No role for politicians in OCR uproar - experts

Banks’ reluctance to pass on last week’s OCR cut may not be popular, but commentators agree it is far from surprising – and politicians shouldn’t get involved.

Wednesday, March 16th 2016, 11:34AM

by Miriam Bell

Recent days have seen growing anger and frustration with the country’s banks, particularly the Australian-owned banks.

This is because of most of the banks apparent reluctance to fully pass on last week’s 25 basis point OCR cut to borrowers – despite Reserve Bank governor Graeme Wheeler saying that he expected them to.

To date, only The Co-Operative Bank has passed on the full cut to its floating home loan rate customers.

Yesterday Labour Party leader Andrew Little said he would consider legislating to force the banks to pass on the reduction, although if he did it would be "with great reluctance and a heavy heart".

He said the government should pressure the banks – who make vast profits - to pass on the OCR cut to help not only struggling farmers but all New Zealanders.

The government rejected Little’s move.

Both Prime Minister John Key and Finance Minister Bill English said it was not a good idea and showed a lack of understanding of banking.

English also told media there was an expectation that the banks would pass the cut on, but that it might take time and competitive pressure for that to happen.

Little’s stance was extremely ill-advised, Massey University banking specialist David Tripe agreed.

He said it was erroneous and that if Little had received proper advice on the issue he would never have made it.

“It is not surprising the banks haven’t passed the full cut on. For a start, part of the rationale for the cut was that bank funding costs have gone up which means they may have started to put rates back up.

“Secondly, bank funding costs don’t fall as much as the OCR. Unless their other rates all fall by the same amount, their costs don’t. And clearly they haven’t.”

Independent economist Shamubeel Eaqub said that given the OCR and mortgage rates are not one-for-one, bank funding costs are up, and they are facing pressure from potential dairy sector losses, the banks’ position was no surprise.

In his view, there are bigger issues at stake in terms of the regulation of the banking sector and there are also legitimate arguments about bank profits.

However, he said there is supposed to be distance between politicians and the banking sector, which is the reason for the Reserve Bank’s existence.

“It might be tempting for politicians to get involved in such an issue, but we don’t want to see them jumping in and trying to set interest rates on a whim or in response to public polling.”

Mortgage broker Jeff Royle, from ilender, also thought politicians should stay out of the issue.

“We have an independent Reserve Bank that does a pretty good job – even though we might not agree with everything it does.

“It is outside politics and it needs to be. It is a good, balanced system. If politicians were to be involved it would be a bad thing.”

There might be public dissatisfaction with the behaviour of the banks – which are already viewed as fat cats making huge profits – but their commercial rationale for not passing on the full OCR cut was reasonable, he said.

“New Zealanders tend to have a pretty rosy view of what is going on in the outside world economically. But the global outlook is currently not a happy one.

“At a time, when funding costs are going up and global economic uncertainties are growing, the banks have probably decided there is a need to bolster their coffers in case of significant economic problems.”

While the uproar over this is understandable, if the banks’ move is in order to better ensure the maintenance of long-term financial stability, he supports it, Royle said.

“I would far rather have a nice, robust banking system than a situation where banks are bailing out of New Zealand or having to be bailed out in the wake of a global economic crisis.”

Tags: banks interest rates Mortgage Rates OCR RBNZ