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BNZ economists question whether the recent 'rebalancing' of our economy has been enough as we prepare for the end of 'cheap money'

Posted in Bonds

The expected rise in interest rates next year could give New Zealand a "bumpy ride", BNZ senior economist Craig Ebert says.

In this week's issue of BNZ's 'Strategist" publication, Ebert has taken a detailed look at the consequences of "when the cheap money ends".

The Reserve Bank has already signposted a fairly aggressive raising of official interest rates next year in response to anticipated rising inflationary pressures.

And in an article published this week RBNZ Governor Graeme Wheeler made explicit reference to interest rates needing to go higher still if the just-introduced "speed limits" on high loan-to-value lending don't dampen house price inflation, which has been running particularly hot in Auckland.

The end of 'cheap money'

Ebert therefore posed the question of  how prepared the New Zealand economy is for the ending of cheap money?

"In theory, it should be good and ready," he said.

Businesses and households had years to sort their balance sheets and cash flow, following the excesses that built up over 2003-07 and the 2008/09 recession. Economic confidence is riding high, he said.

"The reality is, however, that it’s only when the cheap money is actually withdrawn that the true health of an economy, and its financial system, is revealed. In some ways, then, the true test is yet to come."

One of the first

New Zealand, Ebert said, looks likely to be one of the first (developed countries at least) to probe the path back to normal, with Official Cash Rate increases beginning next year.

"We suspect it will be a bumpy ride. But trying to avoid it might only make it a much more painful exercise later down the track."

Ebert said there had been reasonable evidence of "rebalancing" over recent years in New Zealand, with private sector debt ratios falling, household savings rates "substantially recovered" and the current account deficit shrinking.

"However, has the economy’s rebalancing been enough? We’re not entirely convinced that it has.

Not supremely confident

"Running what we’d call 'normal' interest rates through everything doesn’t leave us feeling supremely confident. But failing to do this only increases the chances of it being a much more painful exercise later down the track."

Ebert said households had gone through "deleveraging" in recent years, but despite that, household debt as a proportion of disposable income reversed only a fraction of the increase it registered over the period of upswing, 2003-07.

"And, over the last 18 months or so, household total 'household' debt to disposable income credit growth has rebounded (to a most recent 5.5% annual pace) – to the point of pushing the debt ratios back up."

Ebert said this move had coincided with renewed house price inflation.

Are house price rises justifiable?

"However, the salient question is how well founded has the recent surge in house prices been? It certainly hasn’t been justified by the economic fundamentals that it tends to follow over long stretches – such as incomes, rents, and construction costs. On this basis, the RBNZ has every reason to point out that NZ house prices are clearly over-valued. The Governor is right to worry about the end-game on this."

Ebert said that returning interest rates back to "average" would increase debt servicing costs, giving households a better sense of the relatively high debt loads they continue to carry, overall.

While debt servicing costs have dropped noticeably from their heights of 2007/08 they are still not low by historical standards, even though current interest rates are, he said.

"So a return of rates to back to normal will definitely put the squeeze on."

Potential squeeze

The potential of this squeeze was reinforced by the fact that households were still predominantly on floating or very short term mortgages.

There had been shifting into longer-term fixed mortgages over the last six to 12 months, but "nothing material". with 93% of registered bank mortgages as at August on a duration of less than two years and around half of this on straight floating.

"This suggests a lot of pinch when OCR increases come into play – especially with longer-term mortgage rates already a good chunk higher than short-term ones, giving people 'nowhere to run'," Ebert said.

He said it was worth recalling some recent international examples of economies and financial systems that became complacent during times of easy money, only to feel the backlash when rates had to rise.

"For instance, the way:

  • Large tracts of Asia became dependent on cheap (and abundant) money in the 1990s as they “imported” relatively low US interest rates, in effect, by way of their exchange rates fixings to the US dollar
  • Peripheral Europe – private and public – gorged on overly cheap money upon being admitted to the Eurozone tent. What was good for Germany was not good for Greece
  • Many Americans leveraged into mortgages with extremely cheap short-term rates, underwritten by Greenspan’s 1.0% cash rate and slow reversal

"In these cases (and many more besides) it was only when rates were forced to return to appropriate levels – typically based on broader economic considerations – that the excesses were finally called to account," Ebert said.

"Of course, the world has needed extremely easy monetary policy over recent times – but partly because of the over-easy policy over the prior cycle. Likewise, it’s fair to say that money needs to be cheap for as long as it takes.

"There are risks in withdrawing stimulus too soon. We get that. But it’s also true that central banks have a habit of giving too much for too long. This can engender complacency and false reprieve amongst businesses, households, banks and financial markets, to the point of perpetuating a problem, not being any solution."
 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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73 Comments

Is "cheap money" really going

Is "cheap money" really going to rapidly rise to great heights?
Will NZ be the only 1st world country with super-high interest rates?
Have we heard these claims before over the last 5 years?
Is USA, UK, Eurozone, India, Middle East out of the woods/GFC aftermath yet?  
Is my mortgage really going to be 8.5% next year?
Puzzling questions.
 

For a minute, Wheeler looked

For a minute, Wheeler looked like he knew his job. Looks like he has lost sight of what the RBNZ mandate is. Inflation is on 0.8% and the banks have stability. He needs to to stay within his mandate and that is to keep inflation within the 1% to 3% band. As it is inflation is too low at the moment, interest rates need to be fall. Talking up the interest rates will not slow the property market down. He is just repeating the errors of his predecessors, Don Brash and Allan Bollard in turning New Zealand into a one cow industry. Kiss our manufacturers goodbye. What is wrong with Wheeler? Sucking up to the banks whims?

Your quoted inflation number

Your quoted inflation number is most probably completely wrong. What is inflation? Whyis the RBs performace measured by an inflation number anyway? Is  the RB supposed to control the price of Flat screen TVs made in China- probaly not. What they are supposed to be charged with is maintaining the store of value of the NZD something that they have spectacularly faied at. Are house prices in NZ a better more realistic measure of  inflation- why are house prices kept completely separate from 'inflation'

Plan B, sorry my quoted

Plan B, sorry my quoted inflation is wrong. It is actually 0.7%. Check RBNZ website. 0.8% was in 2012. It is dropping lower and lower and yet Wheeler is talking interest rates up. Is he daft? Can he not read his own statistics?

Zanyzane,   Interest rates

Zanyzane,
 
Interest rates aren't too low, its wages and consumption that are too low. Its what is preventing growth in Europe, especially Germany and the United States. 
 
Lowering interest rates won't do anything. People invest on the basis of return, not cost. Returns are meager around the world, because nobody has got enough money to consume the produce of our economic system. Actual industrialists who actually made money from making or selling things, like Henry Ford and Edward Filene knew that workers who were the primary consumers, needed to have sufficient income to consume the produce of the industrial system back in teh 1930s. Too bad in the West we don't make stuff anymore. We've offloaded the responsiblity to industrial powerhouses like China who are rapidly learning this lesson. Double digit wage growth evidences this.
 
 At the same time, however, the top 10 percent of earners received 50 percent of all income, while they accounted for only 22 percent of spending. Where did the rest of their money go? Much of it went into speculation in the two waves of the bubble economy between the late 1990s and 2008. Had more of that money been in the hands of the bottom 50 percent, more of it would have been spent on consumer goods, including manufactured products, and far less would have gone to gambling on condos in Manhattan and Miami and trendy stocks.
 
http://www.salon.com/2010/10/05/lind_america_plutonomy/
 

I think the RB is really

I think the RB is really constrained by the data. In order to raise rates there has to be the inflation to support it. When we are likely to see that is anyone's guess. The other factor being relative rates,inflation in much larger economies.

Exactly. They have little

Exactly. They have little control over events overseas, but there are a lot of comfortable salaries at the Reserve Bank at stake, so they've got a vesteed interest in perpetuating the nonsense that they have a vital role to play in managing the stability of New Zealand's economy. Well, their job is to manage wage demands by New Zealand workers through ensuring a pool of labour of unemployed ready to fill the place of workers who would otherwise demand higher wages. The Treasury Department was comfortable that the unemployment rate that prevailed in 2004 was sufficient to constrain wage demands, but Stephen Toplis believed that 5% is optimal.
 
http://econfix.wordpress.com/2011/07/06/new-zealands-nairu-and-youth-unemployment/
 
http://www.treasury.govt.nz/publications/research-policy/wp/2004/04-10
 
I think that economic statisticians exclude housing costs from the CPI index, because they know many high income earners who will have the most room to make higher wage demands are also property investors and regard housing as not a consumption cost but an asset. They're gambling that those folks will restrain their demands for salary increases because of the appreciating value of their assets which don't show up on firm balance sheets and don't flow directly into price appreciation. The plight of first home buyers and renters don't factor into their considerations. Its not their purview. 

Zanyzane,   Its no accident

Zanyzane,
 
Its no accident that the financial industry is the only sector who can afford to sponsor a website like Interest.co.nz. Your own property investment depends upon their willingness to provide you credit on favourable terms. I don't know if these clowns realise that property investment and speculation are driven by returns on capital and leverage, not on price. How high will interest rates need to be to pinch into your returns so that its no longer a profitable investment? You guys will gain either way. High interest rates will just discourage potential homeowners from buying and thereby prolonging the length of time they'll be renting. Falling prices from a housing value reversal will dissuade people from putting homes up for sale which will only create pent up demand once the recovery comes and what developer or homeowner will build new housing stock in a buyers market? 
 
Oh well, bankers don't need to be concerned with mere basic economic principles when their Australian parents are manuevering to escape the consequences of their reckless behaviour by lobbying governments to insulate their derivatives from losses in case of an economic reversal.
 
"In particular, what the banks are concerned with — so much so, they call it a “guiding principle” in their response to Treasury — is ensuring that the implementation of bail-ins in Australia will “include appropriate respect for…collateral rights”, with safeguards to protect their derivatives positions against “destruction of value”:
Governing our response to the Consultation Paper are three guiding principles:

Ensuring consistent treatment of transactional claims relating to derivatives and other financial instrument, including appropriate respect for netting and collateral rights, subject to safeguards to avoid destruction of value."
 
In essence these financial reforms will allow banks to bet against their own clients,  who will be carrying the risk AND paying out on the trades.
 
http://barnabyisright.com/2013/08/08/australian-banks-demand-protection-from-derivatives-losses-under-bailin-plan/
 
Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, includeDeutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc., an investment company whose parent firm was overseen by Lewis A. Sachs, who this year became a special counselor to Treasury Secretary Timothy F. Geithner.
 
http://www.nytimes.com/2009/12/24/business/24trading.html?pagewanted=all
 
 
 

anarkist, it is nothing to do

anarkist, it is nothing to do with their own willingness to lend to property, it is their own greed in making record profits. This is what banks do, they offer depositors an income and in turn lend it out. You cannot take deposits and not lend it out otherwise you are going to be in the poo. Who pays that interest on deposits? Of course the borrower pays the interest on deposits and the banks make the margin.

Of course Zanyzane,   Read my

Of course Zanyzane,
 
Read my argument. I'm not complaining about your investment decisions, but commenting on the banker's self-serving rhetoric. The world is the way it is, but for bankers to pretend that their calls for higher interest rates are for the sake of first home buyers who'll be able to be able to have access to more affordable housing if only they got their way is just spurious.  In fact it'll be counterproductive. Rents will only rise in the long run, because of the factors I discussed in my prior comment, lower house building, pent up demand, and few homes for sale. 

Well lets see, he has the top

Well lets see, he has the top RB job and you are a slum lord questioning his judgement?
The funny thing is, I agree with you, it should be 1% or less...LOL, but there you go.
Going to be interesting next year when the RB faces having to carry out its threat of raising rates....Im still waiting after 5 years....on a sick economy....
Yes, sirree...sit back and enjoy the pre-election hocus pocus.
RB wondering if it dares raise about march or June
The asset referendum, doesnt look good for National....
The Election!
I take it you will sell up shortly to avoid Labour's CGT? or are you gonna sit tight and hope when National gets back in they will repeal it?
Not good odds I reckon.
regards
 
 
 
 
 
 
 
 
 

nah not selling, CGT does not

nah not selling, CGT does not affect me as it is not the capital gains that I am interested in. I am more interested in getting my rent up and that is why I am subdividing and building. But man it is very difficult building anything in Aucckland.
 

Possibly the short end of the

Possibly the short end of the yeild curve if he pushes up the ORC and we end up agian (about 5 years ago) where floating to say 24 months rates were high (10% plus) but long term mortgage rates were  in the 7% / 8% range.
Mortgagors fixed at the lowest rates at time (3/4/5 year fixed terms) then when short term rates tumbled they wanted to bail out of their contracts and sufferred early repayment costs.
Wonder what they would do if same thing was repeated over next couple of years.
 
 

Can I say that NZ, currently,

Can I say that NZ, currently, ain't have any comparative advantages in doing anything apart from raising, milking cows and selling milk powders?
 
Anything GOVT can do to change?

Other than milking cows and

Other than milking cows and drying milk powder, I guess we could sell cow dung and methane gas perhaps?
Our RBNZ and bank economists really have a big hole in their head when they don't front up to take the blame for our one cow industry.

... exports from NZ also

... exports from NZ also includes accounting software , lumber & pulp wood , ship mooring systems , honey , wine & beer , horticultural products and seafood , surgical and optical instruments , bakery products , meat , farm machinery , nuts ....
 
Apart from that ... absolutely nothing ! ... right on ,  xingmowang ....

Lets face it guys, capitalism

Lets face it guys, capitalism is falling apart at the seams The days of relying on debt to compensate are coming to a head - time to pay the piper.

Sort of....but all political

Sort of....but all political systems face the cost of expensive and scarce energy....and will falter.
Sure the piper gets paid and its a very long playing tune....20+ years...
regards

Added to this is double digit

Added to this is double digit wage growth in China and their shift towards more domestic consumption. I don't think they'll be so willing to oblige and accomodate our extravagant lifestyles and our inability to live within our means. Thanks babyboomers. Hope you enjoyed the ride while it lasted. 
 
http://www.ilo.org/global/about-the-ilo/newsroom/news/WCMS_192956/lang--en/index.htm
 
 

Who is this piper you speak

Who is this piper you speak of?

This gentleman ?  

Excellent work.  And what

Excellent work.  And what exactly should we pay him do you think?
 
P.S. I warn you now my share will have to go on the credit card.

.. I'd pay the Piper whatever

.. I'd pay the Piper whatever he wanted ... I've seen the bloke kick the snot out of fellas 4 times my size ....
 
I think he's the cultural ambassador for Canada now ..

The proverbial "Piper" is

The proverbial "Piper" is whom ever is owed.
Where can one go with interest rates? Can they be lowered any further?
Whats next Ralph?

Can someone please explain

Can someone please explain where the extra $ go when they raise or lower the OCR? I take it for example the banks borrow at 4% and lend to us at 6%, when the OCR goes up and my payments, are the Aussie just licking there chops and saying bring it on, more money from the Kiwi folks. Thanks for a touch of money 101.

The OCR is a nonsense. The

The OCR is a nonsense. The banks ignore the OCR and set their own interest rates. They have started moving interest rates up and have consistently held interest rates way too high and are just simply threatening Wheeler and forcing his hand, giving the OCR the proverbial finger.

The ORC is just one factor

The ORC is just one factor that influences rates and at the short end of the curve.
The ORC is the default rate the RBNZ charges Banks on their overnight position with RBNZ hence has infuence on Bank Bill and other short term pricing structures.
The OCR has limited impact on the longer end of the yield curve which tends to be funded via swaps / Bonds which are infuenced by global markets where these funds are sourced from.
The influence on ORC and Core Liquidity Ratio can be seen in the under 90 day deposits like savings accounts (anything under 90 days or on call can not be included in Core Liquidity Ratio) that why savings accounts are in that 2.5% range, i.e in line with ORC.

I'll have a crack for

I'll have a crack for you:
The OCR means the Official Cash Rate as which the Reserve Bank of NZ will loan money *inside* NZ to qualifying people (not you and me as I understand it).
So the immediate question from your example of the bank borrowing at 4% is - from whom did they borrow?
If it was borrowed from within NZ then they pay more for it when the rate increases and pass it on in their rates to customers and money "costs" more.
If they either don't need to borrow right now (lots already thanks) -or- they borrow outside NZ then the effect is not so direct.  If every other bank puts rates up maybe they will too and just pocket the difference - who knows.

It depends on where the banks

It depends on where the banks are borrowing from and the terms at which they borrow to meet daily settlement requirements. 
 
Alot of the borrowing they do is offshore in places where bond yields are low. I think this state of affairs will change in the coming years, but the banksters seem intent on talking up the interest rates while worldwide real interest rates are low to provide them with decent margins while the going is still good. Real interest rates are likely to rise as China shifts away from its export orientated economic policy toward greater domestic consumptiona and Japanese workers retire and liquidate their assets in increasing volumes. Yields will have to rise to attract investment. 
 

"Given our relatively high interest rates, New Zealand has attracted a disproportionate share of global liquidity in recent years, putting upward pressure on the NZ dollar despite a relatively large current account deficit. These flows have come in many forms. One particular avenue has been the issuance of NZ dollar denominated bonds in offshore markets: Eurokiwi and Uridashi bonds. The derivative transactions associated with Eurokiwi and Uridashi issuance have provided a mechanism for the New Zealand banks to hedge the interest rate and currency risks associated with their offshore borrowings at cheaper rates than would otherwise have been the case. The upward pressure this has put on the New Zealand dollar and downward pressure on interest rates has exacerbated the current problematic imbalance between traded and non-traded sectors in New Zealand."

 

 

http://www.bis.org/review/r070315a.pdf

No, Again Banking 101. Its

No,
Again Banking 101. Its all about net interest margin!!!!!!
 

Banks are always keen to get

Banks are always keen to get interest rates rising.
Wouldn't you want the price of your product to rise?
Must be frustrating when the OCR keeps flatlining,  the banks have not experienced this ever before -  they don't know how to deal with it.  Oh yes they do,  keep repeating the calls for higher interest rates  (in the "interest" of everyone of course).
Lets put an OCR of 4.5 into your clever spreadsheet models:   Watch the domestic economy dive.  No matter, we dealt with the "housing problem".
 

Rubbish. Banks are concerned

Rubbish.
Banks are concerned about the margin (net interest margin) , not gross / headline rate.
Quite the opposite. Why would they want to see higher rates which could see higher levels of default and possible write offs? Wouldn't they be able to lend out more money if rates were lower? (servicability factor)
When have they been calling (asking) for rates to increase?
Opinions by their Economists that they believe rates may go up is not a repeated call by them to increase rates: they are interpreting the market as they see it, not creating it.
Appear Banks of late have some of the lowest rates in history?
Mortgagebelt, I think you are on the wrong path on this one.
 
 

.. it's really no different

.. it's really no different to PakNSave , they sell alot more tins of beans when the price is lower , than when it's higher ... even allowing for an increased profit margin at an elevated price ... their profits are enhanced by rapidity of  turn-over  .. Banks want lower rates , not higher
 
" Super-Baked-Beans-Profits " will be the Labour Party's clarion call .... no doubt Cunliffe will centralize and ration out our BB supplies , circa 2014 ... as per electricty , light-bulbs , shower-heads  ...

Banks want lower rates , not

Banks want lower rates , not higher.
Glad you agree although your logic is not quite right as Banks profit margins do not increase with the cost of product (money / interest) , infact the opposite exists as they have a fairly fixed margin so as rates increase their Gross Profit Margin (GPM) goes down if you calulate it that way:
Current 1 year TD  4% and 1 year fixed mortgage 5.40% net margin 1.40%. GPM 35%
Future 1 year TD  6.5% and 1 year fixed mortgage 7.9% net margin 1.40% GPM 21.5%
Using GMP of 35%  on future rate scenerio above would be 8.775%, not 7.90% using fixed interest rate margin.
 
 
 
 
 

Oh yes, 'margin' is the other

Oh yes, 'margin' is the other public relations argument that the banks try to sell.  No, no banks are not constantly predicting/calling for rate rises  ..... no,no they want rates to fall so their customers can have a discount. 
Who really knows what their real 'margin' is? They manage to obsfucate their actual cost of funding so who knows? Higher is better - plus it keeps borrowers on their toes.  Their justification for break fees is spurious at best  -  where are the refunds in rising markets? 
Look through every banks 'economists' weekly bulletin for the last 5 years  - always 'rates rising'    how many customers fixed on that advice and lost?    I guess eventualy they'll be correct! 
 
 

Maybe they should take your

Maybe they should take your advice but what are you going to do when its doesn't  quite work out the way you think. Complain to a blog???
Oh yes, 'margin' is the other public relations argument that the banks try to sell. No, no banks are not constantly predicting/calling for rate rises ..... no,no they want rates to fall so their customers can have a discount.
Appears at present the Banks are dropping their rates so customers can have a discount. One year mortgage rates just over 5.00% mark and Term Deposits around 4.00%. Suggest a 1% Net interest margin is fairly tight.
PS what is the other public relations argument in addition to the "margin"one????

Money Man, clearly you do not

Money Man, clearly you do not have a clue how banks make their margin. The biggest margin is made from timing and not from published rates. When lending interest rates go down, banks delay bringing the lending interest rates down for existing clients. But they would use the declining rates to attract new customers. When rates go up, they are very prompt with moving rates up for their existing clients. But they try and gain new customers by offering special sweetheart deals. When lending interest rates moves up they do not necessarily move deposit rates up at the same time.
Also banks source funding from the bond market at much lower interest rates than FD rates. Higher is better because it gives them more playroom to maximise profit margins.

I have a very good idea about

I have a very good idea about bank margins and while you are correct that timing issues you talk about can create pricing opportunities  or threats the overall gains is minimal when considering the over net interest margins Banks collect. If you think banks create therir profits via timing in moving rates why have banks still make record profits when the floating rate (approx half of banks loand are still floating) hasn't moved for a number of years.
Correct Banks can source offshore funding via Swaps / Bond issues etc but there is reduced scope here with Core Liquidity Ratio: they need Retail deposits (90 days plus) to predomintately fund ther lending (or wholesale monies over 12 months).
Higher rates do not give them more playroom as you say its it's a net interest margin game. Net Interest rate margins do not increase as rates do.
If you think they do show me some real evidence and I will be happy to change my mind (sorry you saying so does not count).
 
 

Zany zane.....    I

Zany zane.....    I understand that Banks also profit from playing the yield curve...
ie...  They borrow short term and lend out long term...       a dangerous game that leads to  Bank Liquidity issues at some point in time.   
But they have the blessing of the Reserve Bank...and support...     which none of those finance companies had.

Exactly right Roelof, Money

Exactly right Roelof, Money Man seems to not understand that the banks have more than one way of making a net interest margin. Don't forget also leveraging off the Australian group central buying power and transfer pricing costs into margin pricing. It is the same myopia that our Commerce Commission suffers from. Clearly a cartel in operation with year after year after year of compound record profits for all the banks.

If profitability is that

If profitability is that great maybe you should get a slice of the action and buy some shares in the lised Banks like ANZ / CBA etc?

Ok.  Education time on how

Ok.  Education time on how banks make more money when rates rise.
Banks have a large chunk of NBIs (non-interest bearing deposits) on their balance sheets.  This is essentially free-money and is made up of cheque accounts, no or very low interest savings accounts and the like.
If for example a bank had $5 billion of this, then a 1% increase in rates would equate to an extra $50m of profit straight to the bottom line.  a 2% increase in rates.
Bank margins are no symmetric because all products do not have the same degreee on interest rate sensitivty.  Bank profits rely on sensitivity of consumers to interest rate changes.
As interest rates fall deposit margins get contracted, and in particular the margin on non-interesting deposits gets hammered.  (There is no customer interest rate to decrease.)
Banks manage this risk by investing in long term interest rates using a moving average (usually using the 5 year swap rate.)  This means that any fall in interest rates has a slow impact on its bottom line.
However banks make large bets on interest rates using their own balance sheet and the banks Chief Economists are on the ALCO Committee that is responsible for making these bets.  In a low rate environment the Committee will unwind its 5 year moving average position and shorten it in anticipation of rising rates.
The bank will stand to make lots of money if the their "Market Teams" and the "Economics Team" position the bank's balance sheet correctly.
Back to interest  rate sensitivty.
Depositors have a natural floor.  For example with term deposits rates can't really drop below 4.00% otherwise deposit jump out of bank deposits into other forms of investment (like property.)  With low rates term deposit margins for banks have been descimated.
Mortgages on the other hand are largley price takers.
In a rising rate environment the banks will make a serious windfall especially with RBNZ restrictions killing competition in the mortgage market.
As rates rise the banks will claw back margin on their term deposits (i.e. headline deposit rates wont move much as wholesale rates go up), NBI wil give them a big windfall, and they'll be able to maintain mortgage margins unless price competition breaks out.
In a high rate environment it is usually mortgage price wars that keep bank profitability in check.

Don't disagree with a lot you

Don't disagree with a lot you are saying: non interest bearing deposits which is a small portion of overall deposits compared to the past with ability to transfer funds online into and out of interest bearing accounts  via Internet and smart phone in an instant.As a guessimate I would say no more than 5% of depsosits are in non interest bearing accounts and many of the accounts these funds are held in are fee free so not straight profit as cost to maintain these  accounts need to be factored in as well.
You are right that there appears to be a natural floor at 4.00% with oncall/online savings products positioned here to capture under 12 month money (like Rabo onine product).
One area I do disagree on will be in compedition on mortgages: heavy compedition in pricing area for under 80% LVR and none in the over 80% as there is more demand than Banks will be able to meet here. This as well this can only represent 10% of the banks lending (excluding a very small number of exclusions like Welcome Home loans) so the additional profit made here will be used to offset the discounting going on in the other 90% (under 80% LVR).
In general the more under 80% of new lending banks can do the more over 80% they can do. Its about new lending, not the current LVR spread on the banks books.
Interesting times to say the least.  Bank margins will continue to be squeezed.
 
 
 

Over 80% reflects about 20%

Over 80% reflects about 20% of bank balance sheet so the margin gain under the new rules is huge.  Remember banks are applying these new over 80% carded rates to all business over 80% (ignoring low equity fees/margins which are upfront.)
This wil be used to offset the profit growth that would otherwise come from overall debt growth.
There might be greater price competition below 80% but banks will not want to cannibalise their existing books.  A competitive market tends to eventuate when there is overall industry growth.  That's when Analysts switch from focusing on profit to share of growth.  
The exception is Kiwi Bank which is still small enough to have plenty of upside pursuing the refinance market.  That's what they are good at - simple refinancing.  Service is worse than average when it comes to the house buying process because they don't have the capacity in their business to cope with it. 
It has been an intentional strategy of Kiwi Bank for years to refinance other banks customers rather than chase new business  and it has worked pretty damn well you'd have to say.
Bankers are hugely profit focused.  If they can't get it through growth they'll get it through margin where ever possible.  
Term Deposit managers move their specials around to stump old people who simply roll there deposits over for the same term.  When is the last time you saw a bank do a 90 day TD special?  That's the margin game : )
The problems confronting the industry are (1) they can't go down the punative fee route again.  That's been done before and got ugly (2) the industry has moved towards fee free banking as you say, (3) some of the banks here have gone OTT on their branch networks and now trying to figure out WTF to do about the cost given margin growth is slowing.
The move back to fixed rates will be a problem for banks.  They made so much margin with the switch from fixed.
Banks will not be happy with the RBNZ killing off balance sheet growth.  The perfect sceanrio for a bank would be lots of balance sheet growth and higher interest rates.
The perfect storm would be no growth and low interest rates.  Why do you thing the banks are so pissed with the RBNZ not doing the normal "put rates up."  He's not playing the game properly.
I feel some pain ahead.
By the by, interest rates will not go up anytime soon.  They won't need to.  The RBNZ will successful kill easy credit.  Graeme is simply jaw boning because he isn't confident enough in his new tools.
I'm betting he'll win.
 
 
 

Mr No Pants, Please analyse

Mr No Pants,

Please analyse this man losing his shirt below. Plus how many investors will follow suit.

How many more will lose the lot on margin. Are Banks exempt from error.

You seem to have some idea on investing, I would be interested in your comments.

http://www.businessweek.com/articles/2013-10-03/eike-batista-how-brazils-richest-man-lost-34-dot-5-billion#r=rss

The world is full of people

The world is full of people like Batista.  Ours are just much smaller versions.
Most "notable" property developers here in NZ would have the same personality traits.  Think Peters, Krukziener, Neilsen, Henderson, Serepisos, McKenna.  All bankrupted.  
Easy to spot.  They'll have "hot" wives or girlfriends.  Driven by the thrill of the deal and winning.  To get what they want, they'll say whatever people want to hear.  Can sell snow to eskimos.  Then they fatally believe the deluded reality they sell everyone else.  
Any problem can be solved by money.  Its not what you know, but who you know.  Generious to a fault when they get what they want.  Can be disarmingly charming.
Incredible almost unbelievable resilience.  You can metaphorically beat them up or bankrupt them and they bounce back time and time again.  AND we let them.
After 1987 when we were deregulated we had Judge Corp, Chase Corporation, Equiticorp. In 2007 and 2008 we had Blue Chip, Bridecorp, North and South (and the list goes on)
How much money have Kiwis lost throwing money at people like Batista.

It has been an intentional

It has been an intentional strategy of Kiwi Bank for years to refinance other banks customers rather than chase new business and it has worked pretty damn well you'd have to say.
If you start with no clients their the only option is to get other banks clients. Kiwibank had no other option but to re-finance (existing debt with no new property purchase) or new property purchases. From what I see they have gone after both but if you start with nil market share then refinances is the best place to start. No different to ASB when it started outside Auckland 20 odd years ago.

No Pants.. The perfect storm

No Pants..
The perfect storm would be no growth and low interest rates.  Why do you thing the banks are so pissed with the RBNZ not doing the normal "put rates up."  He's not playing the game properly.
Why would that be a perfect storm..???
I would have thought a forever expanding balance sheet would be the more dangerous senario....?   and rising interest rates ..( that might impact the larger economy )?
Cheers  Roelof

Term Deposit managers move

Term Deposit managers move their specials around to stump old people who simply roll there deposits over for the same term.  When is the last time you saw a bank do a 90 day TD special?  That's the margin game : )
I think if you had a look at the Core Liquidity Ratio requirements by RBNZ  you would see that term  deposits under 90 day are excluded from this hence the reason for no specials in this space and lower.
A competitive market tends to eventuate when there is overall industry growth.  That's when Analysts switch from focusing on profit to share of growth.
I would tend to suggest that compedition is greater when the is lower overall growth as Banks scramble to get a greater market share and preserve revenues.
Think back 1/18 monthsago when Banks were paying Early Repayment Fees to gain new clients in a period of low credit growth. 
When there is high growth increased lending growth (thus increased revenues) can be obtained by just capturing your natural market share and not having to buy more.

 

Term Deposit managers move

Term Deposit managers move their specials around to stump old people who simply roll there deposits over for the same term.  When is the last time you saw a bank do a 90 day TD special?  That's the margin game : )
I think if you had a look at the Core Liquidity Ratio requirements by RBNZ  you would see that term  deposits under 90 day are excluded from this hence the reason for no specials in this space and lower.
A competitive market tends to eventuate when there is overall industry growth.  That's when Analysts switch from focusing on profit to share of growth.
I would tend to suggest that compedition is greater when the is lower overall growth as Banks scramble to get a greater market share and preserve revenues.
Think back 1/18 monthsago when Banks were paying Early Repayment Fees to gain new clients in a period of low credit growth. 
When there is high growth increased lending growth (thus increased revenues) can be obtained by just capturing your natural market share and not having to buy more.

 

Clearly No pants knows what

Clearly No pants knows what it is all about. Grant A and Money Man, both of you should try and read what No pants has written and try and understand your respective businesses. I understand you are just little cogs in a banks giant machinery but do try and get an education of how it all works. Perhaps No pants should consult for our Commerce Commission because it looks like they are also in need of some expertise.

 but do try and get an

 but do try and get an education of how it all works.
You mean so we get an education so we see it from your prespective and then agree with everything you say?
By the way litlle cogs doesn't mean unimportant or critical. Try taking just one cog out of a gearbox and see what happens.
 
 
 

Sorry lots of typos in that

Sorry lots of typos in that last post.  
I'm not "english as a second language." Just got out of bed and sitting here without my glasses on in the nude and haven't had breakfast yet.

.... knowing that , most of

.... knowing that , most of us will close our eyes or look the other way , when we read it ...

Good that Mr No Pants was

Good that Mr No Pants was able to post without a censorship filter. 
 The normal Bank Apologists: Money Man & Grant A etc, were not able to sell their "social media infiltration" party line.  
Let's watch next week as the "Bank Economists" keep calling for/predicting interest rate rises.  Of course they may actually be right pretty soon, as they have been wrong for a full 5 years, and the law of averages is now working for them!
 
 

The normal Bank Apologists:

The normal Bank Apologists: Money Man & Grant A etc, were not able to sell their "social media infiltration" party line. 
I have got no idea what you mean by this????
Out of interest you appear to be calling for rates to continue to fall if I have read your blogs right? Do you still hold that view?

Money Man, well the HSBC

Money Man, well the HSBC stepped out of line and dropped their short term rates to 4.75%. Only problem is that I am getting less than that offer so can't shift my banking. The quoted rates are higher for the general public mugs that don't ask for a lower rate and gives the banks an excuse to move interest rates upwards for their general client base made up of more mugs. And it looks like you too fall into the category of a general public mug that does not query how banks make their record profits and have fallen for the marketing spill of banks, we are making only slim margins....and then oooops report record profits, not from net interest margins but from selling toothpaste. Yah right???

HSBC terms and conditions

HSBC terms and conditions from their website is below so they need to con you into getting another $100,000 of debt or bring you from another bank where from website I couldn't see any legal costs or professional contributions to assist. Not sure of branch representation is like or any of their other products and services.
Their premier quailication creteria is below as well. Not a mainstream bank so a great example of put up on falling interest rates.
Might pay to be a bit more research in future.
PS I know quite a bit about Banking and Finance so not one of those public mugs you talk about. Are you ones of those mugs that believes everything that banks does is evil, should be a public service and should not make a profit on what are very big and complex businesses?
 
Offer available to new HSBC Premier customers or existing HSBC Premier customers who borrow an additional NZD100,000. To qualify for this offer customers must have at least 20% home loan deposit or equity. Premier qualification criteria applies.
HSBC in New Zealand will only provide home lending, savings and/or investments to new customers if they meet our HSBC Premier qualifying criteria:

  • A minimum value of NZD500,000 in home loans with HSBC in New Zealand (facility limit not outstanding balance); and/or
  • A minimum value of NZD100,000 in savings and investments with HSBC in New Zealand; and/or
  • If you're an overseas HSBC Premier customer, you'll automatically qualify for Premier customer status in New Zealand

Money Man - please can I give

Money Man - please can I give you a bit of advice. Youre arguing with two of the most uninformed people on this site when it comes to interest rates. I have tried to inform and reason with them, as have others such as yourself, but I have recently given up and am now content to let them stay ignorant of the facts and content with their biases.
You will only get frustrated, be further accused of bias, and flat out dumped on as I will be in response to this post. The advice, forget them for they know not what they do.
 

Thank you for your advice and

Thank you for your advice and totally agree with your sentiments.
Look forward to your future contributions.

What's the term " bank

What's the term " bank apologist " mean , anyway ?
 
... the way I figure it , alot of Kiwis are bank apologists , 'cos they're sorry they're always being screwed on fees ....

And screwed on some of the

And screwed on some of the highest lending interest rates in the world whilst our banks makes record profits.

Money Man, well well, you

Money Man, well well, you have got it wrong again, perhaps you need to rethink your choice of profession. Westpac is offering 4.65% fixed for 2 years. HSBC stepped out of line with their 4.75% offer and this is what we need is for a bank that is prepared to stop this cartel controlled interest rates. Lets have some real competition.
Don't forget BNZ offset loans of 4.59%. Believe me there is a margin there somewhere. No one gives away margin.
 

Not great examples you have

Not great examples you have used:
1. HSBC minimum loan $500,000 as per a previous posting.
2. Westpac two year carded or advertised rate is 5.65% as per their website this evening.   At least I know the difference between 4 and 5..:......
3.In regards to BNZ the rate is not as simplist as you say (could be) as per BNZ quote off their website:
 
With a BNZ TotalMoney home loan, your effective interest rate could be a lot less than you expect. The current TotalMoney offset home loan rate is 5.74% p.a. but over 17,000* TotalMoney customers have an effective rate of 4.59% p.a. or less.
TotalMoney works by taking the combined balances of your saving and everyday accounts and subtracting (or offsetting) them from the total owing on your mortgage, and you only pay interest on the difference. The amount of interest you actually pay after offsetting, divided by the full balance of your TotalMoney loan gives you your effective rate. And it could be a lot lower than you think.
Your home loan payments are still calculated using the current TotalMoney rate, however as you’ll be paying less interest, you’ll pay more off the principal, meaning you could be mortgage-free faster.
Sorry Zanyzane, bit of an own goal here by you here???
 
 
 
 

 

 

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[moved comment]

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Muchass Gracias Senor No

Muchass Gracias Senor No Pants.
So, a Brazilian who might just bounce back from his haircut. How apt.
 
 

And just to prove what I said

And just to prove what I said Money Man, you'll note that the worst of them are those that repeatedly  indicate that they think that the banks themselves are the major determiner of where NZ rates are set.

Do u include Central Banks in

Do u include Central Banks in that ..????
After all...  Banks and Central Banks are joined at the hip...  or at the least.. the relationship seems opaque and not really at arms length...    ( Largely Thinking of the FEd here )

Hi Roelof - depends how you

Hi Roelof - depends how you mean it.  For NZ certainly the RBNZ is the key player in setting the OCR and therefore indirectly the shorter end of the term structure. The markets perception of what sort of job they're doing to contain inflation or otherwise impacts the long-end, as does general supply and demand for funds, and most particularly US long rate level and direction.  The banks solely just set what margin they charge above their wholesale cost of funds (which includes liquidity costs that have blown out from nothing to 100-150bps) as much as they can in  a very competitive banking market. Margins are currently close to pre GFC levels.
I can't really comment, just guess, upon the US banking and central bank relationship, but I'm sure it's a totally different one to here bearing in mind the US banking system played a big role in triggering the GFC collapse, and I'm sure there clearly seen to have been an awful lot of colusion between them in attempting to extract the position or more.

Very skeptical that inflation

Very skeptical that inflation or the OCR will be materially higher over the next few years.

As soon as there is any sputter of life in the global economy the NZD is pushed higher keeping what little inflation there might be contained. Any rate hike will likewise spur the NZD higher still and put a brake on our local economy also strongly countering any inflation and removing the need for subsequent rate hikes.

Don't rely on rate hikes bringing sanity to the housing market, only policy changes that encourage more home building and stop incentivising property investors will fix that.

Kiwisaver is doing a better

Kiwisaver is doing a better job than interest rate hikes. Retail consumption is dampened due to $15billion drawn out of the economy and put into kiwisaver. Next year companies have to put in another 1% increase to 4% plus employee contribution of 4%. That would continue to dampen consumption but increases an individuals wealth.
Having a variable compulsory Kiwisaver would be just the correct medicine instead of the wrong call in higher interest rates. Wheeler should befactoring the impact of kiwisaver on future consumption.

I can't find anything that

I can't find anything that suggests there will be another increase in the KS minimum contribution next year - source please?