Opinion: Banks delay inevitable mortgage rate reductions

The 2-year wholesale swap interest rates are now at 5.50%, with the moneymarkets pricing in another 1.00% OCR cut on the 4th of December and some more after that in the first half of 2009. Home mortgage lending banks after applying their higher 2.00% margin, should be reducing their customer lending rates to 7.50% very soon. However they all remain at 8.20% (except Kiwibank) and are deliberately lagging the market interest rate falls until the RBNZ official OCR cuts on 4th. December. The 90-day wholesale rates are pushing below 6.00% today; therefore floating mortgage lending rates should be cut to at least to the 8.25% area sooner rather than later. Most remain at 9.45% and are creaming a massive 3.50% margin above their wholesale cost of funds. To be fair, the banks are paying 0.75% to 1.50% above wholesale market base rates for their term money these days. No wonder the RBNZ is becoming a bit frustrated at the slowness in the reduction of the effective mortgage lending rates. Perhaps they could have a chat with the new PM, who understands financial markets as well as political/voting markets, and he could put some pressure on the banks to act earlier. The Government in Australia has no hesitation in haranguing the banks in this fashion. We hear that the big four banks have been losing many borrowing customers to Kiwibank over recent weeks. Competitive markets forces will be at work very soon to drive the mortgage lending rates lower.    --------------- *Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com