A low OCR and weak loan demand means weakening term deposit rates

Wholesale market signals predicted the hold in OCR rises, and with the Canterbury quake, we should expect softer term deposit rates in the planable future.

Yields on NZ Government bonds have softened in the last six weeks, and the 90 day bank bill rate has been going sideways.

But the big influence on term deposit rates has now shifted from these wholesale benchmarks, to the impacts of the RBNZ's core funding ratio on banks.

The bank's needs for funds now depends on the technical structure of their balance sheet. If they need funds to bolster their position, they now need to focus much more than in the past on local TD offers.

But if demand for loans is weak, that pressure evaporates. And in fact, both business and agriculture demand for funds is currently very weak.

Even more interesting is the mortgage demand - it is Kiwibank that is supplying the bulk of the current aenemic demand, and when Kiwibank wins mortgage business from its big four competitors, there is a funding shift of real cash from Kiwibank to those banks as the loan transfers. In effect, funds pour out of Kiwibank into the Aussie-owned banks.

Even though they lose short-term mortgage market share, they gain cash and ease their balance sheet pressures.

If this goes on too much longer, Kiwibank may accentuate its own capital and funding pressure, and need to draw back while it absorbs the new business it wins. This in turn will give the big banks an opportunity to increase pricing margins (higher mortgage rates, or lower TD rates) to make up for market share losses.

Unless Kiwibank ups the ante and raises its term deposit rates to fund its borrowing growth, we expect a slow but steady falling away in term deposit rate offers over the rest of 2010.

This expectation will change if the economy picks up, however, and growth leads to increased loan demand. But businesses and consumers are not in that mood, and new home buying is running at unusually low levels.

Kiwis are deleveraging - and that means softening of term deposit offer rates.

Depending on your own circumstances, some people may find it time to 'go longer' with their TDs to hold on to current rate levels.

 

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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2 Comments

The rebirth of Finance Companies - supporting the greedy HA !

It's rubbish. You can get 5.5% GG for 6 months if you look....and 4.5% oncall in aus.

Even better if you go out and buy what you need in bulk and store it. 6 litres of oil for $30 today and put it away...maybe save $20 on the stuff in one year. That's a 66% return! Put some money into a chookhouse with a neighbour....the return in food will beat a 100% return by heaps. Need new tires for the heap in a couple of years?...get them on special now and put them away...feed the sprogs on rolled oats and sultana...both can be bought in bulk and store well...don't forget the dunny paper!...baked beans in bulk...tinned fish....got a west coast beach that's suitable, buy an electric kontiki with some mates and never look back.

This push to have you put spare money in a bank account is their fishing trip...you are the catch!