RBNZ's Bollard calls on banks again to 'play their part' and pass on rate cuts (Updated)

RBNZ's Bollard calls on banks again to 'play their part' and pass on rate cuts (Updated)
Reserve Bank Governor Alan Bollard has again called on banks to pass on cuts in wholesale interest rates to customers, saying they had profited from the good times and should not shrink from playing their part during the tough times. He said banks should not underestimate the level of 'corporate anger' over business interest rates being held up. (Updated to include comments on 'corporate anger') "The banks also have a key role in assisting the New Zealand economy," Bollard said in a speech to the Jobs Summit in Auckland. "They face a big challenge operating at his time of fragile international markets, and it is completely appropriate that they should now be very conservative," Bollard said. "However, they have profited from good times in this economy, and we expect them to be there for the tough times too," he said. Bollard said: "That means they need to:
  • Keep seeking international funding (as has happened in Australia) and parent support
  • Use the support mechanisms put in place by the New Zealand government
  • Keep passing on wholesale interest rate cuts
  • Keep lending on sensible proposals
  • Avoid onerous conditions on lending that have the same effect as a credit crunch."
"This summit is the opportunity for banks to restate their commitment to New Zealand's economic health," he added. "Don't underestimate the amount of corporate anger out there currently with regards to the banking system," he said, departing from his speech notes. What I think The Reserve Bank is right to give the banks some gentle stick. Banks have passed on the rate cuts to mortgage borrowers, but have passed only some of the rate cuts on to business borrowers. How much of the rate cuts that have been retained as profits is debateable. The RBNZ measures of base business rates and the anecdotal feedback from businesses both say only a third of the 475 basis points of Official Cash Rate cuts have been passed on to businesses using overdrafts or other such facilities for funding. Less than third of the rate cuts have been passed on to credit card borrowers. Banks are reporting margin pressure across the board because they are having to roll over foreign funding at high margins to wholesale interest rates, but it is clear banks are again choosing to subsidise 'easy' mortgage lending by keeping rates high for business. Banks would argue that business loans are riskier in a deep recession and have already reported a sharp rise in bad debts from businesses. But still, banks need to support their long term customers through the bad times as well as the good times. To their credit (pun intended), the banks are continuing to lend more to most customers at a time when many non-Australasian banks are actively 'de-leveraging' or calling in loans. RBNZ figures (C5) show banks increased total lending to businesses, farmers and households by NZ$640 million to NZ$298.8 billion in January from December. Although the increased lending was largely to households and farmers. Business lending actually fell by NZ$187 million to NZ$79.99 billion. This is an area of concern. Businesses are the biggest employers in the economy and they need to be encouraged to keep employees on or avoid job losses. Keeping interest rates high and cutting lending will not do that. Your view?  

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