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RBNZ Governor Wheeler sees mortgage costs 'biting'; Banks' funding position 'comfortable' so no need for a deposit price war

Posted in Personal Finance

By Gareth Vaughan 

If the Reserve Bank's message for mortgage holders is "get ready for some pain", its message for depositors appears to be "the banks don't need you as much as they used to."

This comes from a Reserve Bank that's pointing to rises in the Official Cash Rate (OCR) to 4.75%, more than double the current 2.5%, by early 2016. That could also send bank mortgage rates north, from below 6% now to as high as 8% by early 2016.

The Reserve Bank points out in its latest Monetary Policy Statement (MPS) that although borrowers have been switching to fixed-term mortgages from floating mortgages, they're doing so for short terms meaning OCR increases, if they do come, will have an impact.

"Borrowers continue to switch out of floating rates onto fixed rates. At the end of October, the share of floating-rate mortgages was 43% compared to 56% a year ago. Most of the mortgage rate fixing has
been for short terms, with the share of fixed mortgages up to a one-year term at 30%. Thus, the combined share of floating rates and fixed rates of less than one year duration is 74%, well up from the trough of 37% in mid-2007," the MPS says.

At the press conference following the OCR review and issue of the MPS yesterday, Reserve Bank Governor Graeme Wheeler said of this 74%: "That means that when monetary policy does tighten, those mortgage costs have the potential to start biting in terms of debt servicing costs."

According to the MPS, the effective mortgage rate for existing loans, based on a weighted average of existing mortgage stock, currently sits at 5.51%. 

Meanwhile on the other side of the ledger, the MPS points out funding conditions remain comfortable for New Zealand’s major banks.

"Access to funding is easy and pricing is about as low as it has been since the global financial crisis."

Times were better for depositors a year or two ago, the MPS adds, when banks were competing aggressively to attract retail deposits to improve the share of their funding that's counted as “core” under the Reserve Bank’s prudential liquidity requirements.

"In that environment, deposits became relatively expensive (for banks). However, the more recent experience has been one of more comfort (for banks) with core funding levels and deposit growth remaining strong (around 10% per annum) despite less-competitive pricing," the Reserve Bank says.

"During 2012, banks were paying almost 200 basis points over the one-year swap rate on one-year term deposits. That spread is now down to just over 100 basis points. Over the past 18 months the six-month term deposit spread to six-month bank bills has fallen from around 160 basis points to just over 100 basis points."

"With little pressure on funding, new (bank) issuance of long-term wholesale debt (bonds) more reflects the desire to maintain a presence in offshore markets or to roll over maturing debt," says the Reserve Bank.

"Long-term domestic bank debt trades at an average spread to swap of about 80 basis points, 75 basis points below its levels of a year ago."
 

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9 Comments

So if you are a borrower your

So if you are a borrower your interest rate is likely to go up...........and ...........if you are a saver your interest rate is likely to stay the same, or even go down.
uuuuumh......... there is something I am misunderstanding in that equation..

The message could not be

The message could not be clearer for unsecured depositors - take the money out of the bank. The necessary rewards to offset the OBR risk of equity stakeholder status are not about to be offered. Capital preservation is paramount in a world held together with central bank printing to the tune of ~$159 billion a month from the Fed and BOJ alone.

@Steven Hulme , you could be

@Steven Hulme , you could be right , this money printing is going to have some unintended consequences, the likes of which we have never seen before , and for which there is no textbook reference .
Like an alcoholic or drug addict , the unpleasant  symptoms or effects will only become evident on withdrawl

I told people on this site

I told people on this site and elsewhere this message months ago. Get your deposits OUT of the banks, turn it into anything really useful other than fiat currency. As much as you can. It's time to leave the corrupt banking system high and dry. 
They don't need us? Bull SHIT! No future bailouts I guess will be needed then either!
Banks are scum of the earth. Plain and simple

Exactly right, Wheeler is

Exactly right, Wheeler is foolish to try and fight the tide of offshore cash buying kiwi assets by increasing interest rates in NZ. The unintended outflow from freely printed money is capital asset inflation. The value of offshore money is devaluing each and every month. And the outcome is buying up real and tangible assets.
Rather than borrow $40 billion for a Christchurch rebuild. We need to print $40 billion to pay for it. That would be the prudent course of action in these times. Whats the point of being disciplined when everyone else prints money freely and buys up all your tangible assets.

I thnk they are effectively

I thnk they are effectively saying that there is no point in saving. Either spend or use your money to buy overpriced houses, to keep the housing bubble inflated. It also meaans fatter margins for banks, if they don't need to pay savers as much.  I think they need to burst the property bubble, becuase currently it mean that people are paying so much of their income to overseas banks in terms of mortgage payments and interest, that they don't have the money to spend in the economy.

Buy gold Stephen, the only

Buy gold Stephen, the only true cash ?

Buy gold Stephen, the only

Buy gold Stephen, the only true cash ?
Your tongue stuck firmly in your cheek there Grant A.....? not while the Fed Control  both ends of the market.....you may as well buy more U.S. Dollars in an offshore account calling it limbo......the long game is all about control at the parameters of fiat and anything beyond that interferes with the theft in progress.
There will again be a happy buck supported by a golden glob, but not until the  skinning is complete and debts are closer to managable settlement .
Of course an inconvenient war could become the impediment to the Fed's exit strategy, the Euro recovery strategy,  the central banking systems belief they have it covered.
Remarkable that we should live through a time when blatant theft should be the resort for the so called greater good.

So what do we have with the

So what do we have with the narrowing spreads,is it a domestic savings glut or a sign of higher ratios of off shore funding?