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Finance Minister Bill English has announced that New Zealand’s government guarantee for wholesale bond issues by banks will end on April 30, following the end of a similar Australian guarantee from March 31.

The guarantee was used by New Zealand’s banks to issue NZ$10.3 billion worth of bonds under 24 guarantee certificates. There have been no payouts and the guarantee fees earned the government NZ$290 million in fees, English said.

The guarantee was set up in November 2008 in the middle of the financial crisis after Australia’s government set up a similar scheme.

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By Emma Geraghty

Moves by the Commerce Commission late last year to increase competition on credit card interchange fees and cut retailers’ costs by around NZ$75 million have yet to bear fruit as retailers, banks and credit card companies are stuck in a Mexican stand-off to see who will take the first pain. Consumers, meanwhile, have also yet to see any benefits.

The first moves in this impending battle were made in early January when several independent petrol stations started adding credit card surcharges and some government departments started charging these fees for payments online. These moves followed a slew of announcements from the Commerce Commission in August and October about settlements with banks and credit card companies that removed a ban on these surcharges and removed restrictions on so-called ‘interchange’ fees charged to retailers by banks.

The commission hoped these moves would free up the market, forcing the banks and credit card companies to compete with each other and push down fees and, ultimately, prices for consumers. But this has yet to eventuate.

Instead some retailers and government departments have simply added the fees onto  prices to bolster their profits, raising fears consumers will abandon credit cards and use EFTPOS and cash more often, which would cut the NZ$28.5 billion a year spent by New Zealanders using at least 3 million credit cards.

Profit windfall?

If all retailers were to add the current interchange fees of around 2% to all credit card transactions and they didn’t pass that on in the form of lower prices on all goods this would deliver a NZ$570 million profit windfall to retailers and potentially deliver a slight one-off boost to the inflation rate, adding extra pressure on the Reserve Bank to raise interest rates.

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Westpac New Zealand has increased its 1 year mortgage rate to 6.29% from 6.20% and has raised its ‘capped’ 1 year rate to 6.55% from 6.20%. (Update 1 includes SCBS rate hikes.)

This lifts Westpac’s standard 1 year rate above ANZ on 6.20%, above National on 6.15%, above Kiwibank on 6.25%, and above BNZ on 6.25%, but it remains below ASB on 6.55%.

Meanwhile, Southern Cross Building Society (SCBS) hiked its one and two year mortgage rates by 20 basis points to 6.10% and 7.10%, respectively.

See all mortgage rates here.

The average bank 1 year mortgage rate has risen from 5.6% in July to 6.25% as banks lift their fixed mortgage rates to match their higher funding costs. They are competing hard to raise deposits locally by increasing term deposit rates well above the record low Official Cash Rate (OCR) at 2.5% and are also having to pay more for scarcer funds on international wholesale markets.

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Credit rating agency Moody’s has upgraded its industry outlook for New Zealand’s banking system to stable from negative, saying asset quality concerns should ease following a return to economic growth and unemployment forecasts lower than previously thought.

(Update 1 adds Moody’s report.)

Moody’s also changed the Australian banking industry’s outlook from negative to stable.

Here are Moody’s comments on New Zealand’s banking industry. Outlooks for industries represent Moody’s view on the likely future direction of credit conditions in those industries. They do not represent Moody’s projections of rating upgrades versus downgrades

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Westpac has raised its six and eighteen month mortgage rates by 10 and 20 basis points, respectively, but left other rates on hold. Westpac’s new six month rate is 5.69%, which is equal to its Everyday floating rate, and its new eighteen month rate is 6.79%.

See and compare all mortgage rates here.

While fixed mortgage rates have been rising in recent months, partly in anticipation of OCR hikes later this year, variable rates have remained stationary as the Reserve Bank holds the Official Cash Rate (OCR) at its record low of 2.5%. Inflation figures out earlier this week supported the Reserve Bank’s view that it could keep the OCR on hold until around the middle of 2010, pushing back market expectations for an OCR hike to the April-July window, from March.

One effect of the market having low variable rates and higher fixed rates is many borrowers are shifting to the ’short-end’ of the rate curve, opting for variable or short-term fixed rates. This has given the Reserve Bank’s monetary policy much more potency than it had over much of the last decade, as a change in the OCR quickly flows through to shorter-term rates.

See here for a piece on how the RBNZ’s monetary potency has increased as the proportion of home loan borrowers on floating mortgage rates hit its highest level in almost five years.

Kiwibank has hiked its two, three and four year term deposit rates by 25 basis points, while ASB and Westpac have also made a number of rate changes. See and compare all deposit rates for terms less than one year here, and terms one year and greater here.

Kiwibank’s new two year term deposit rate is 5.5%; three year 6%; and four year 6.5%. The new rates are equal to top rates offered by other banks for their respective terms. At the same time, Kiwibank cut its five month deposit rate by 75 bps to 3.75%, but raised its six month rate by 60 bps to 4.6%. (Corrected second to last paragraph of background to say 2009 not 2010 and to include requirements for longer term foreign funding).

Kiwibank’s new six month rate is still below ASB’s new market-leading rate of 4.8%, after ASB raised the rate 20 bps for deposits over NZ$10,000. ASB also cut its nine month deposit rate by 85 bps to 4.25% and cut its four year rate by 25 bps to 6.25%.

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