Term deposit rates falling: Westpac joins Rabo, BNZ, ANZ National to cut: Reserve Bank eyes possible upward pressure on deposit rates if credit demand picks up

Term deposit rates falling: Westpac joins Rabo, BNZ, ANZ National to cut: Reserve Bank eyes possible upward pressure on deposit rates if credit demand picks up

By Alex Tarrant

Westpac, RaboDirect, BNZ and ANZ National have cut term deposit rates in the last 24 hours, after Kiwibank and TSB cut earlier in the week.

Rabo cut its six month to two year rates by between 10 and 20 basis points (0.1-0.2%). BNZ cut its one to five year rates (but not its two year) by 10 to 35 basis points. ANZ and National banks cut their six month rates by 30 basis points.

See and compare all term deposit rates for terms up to nine months here, and for terms one year and above here.

Wholesale swap rates have fallen by about 40-70 basis points since late March after rising in February. See all swaps rates here.

But deposit rates may stay relatively high if credit demand picks up

Meanwhile, the Reserve Bank says if credit demand picks up significantly over coming years, that, coupled with the combination of new bank funding requirements, may make banks bid up retail deposit rates relative to wholesale rates, especially if it becomes harder for banks to access global funding markets.

In its May Financial Stability Report published on Thursday, the Reserve Bank noted bank efforts to increase their core funding requirements had been supported by an increase in retail deposits from households and firms.

Core funding requirements stipulate banks must currently source 70% of their funding from retail deposits or longer-term wholesale funding. That's set to rise to 75% at the start of 2013. Meanwhile, by 2015, 70% of current long-term funding will no longer qualify for core funding requirements, meaning this funding will have to be replaced.

The rise in retail deposits recently from households and firms reflected increased precautionary savings, temporary factors such as quake insurance payouts sitting at banks, and the relatively attractive returns on bank deposits compared to other forms of investment, the Reserve Bank said.

"This retail deposit growth has helped to meet bank funding needs at a time when conditions in global wholesale markets have been strained. The low level of credit growth in the economy and weak credit demand have also helped insulate banks over the past year from the need to fund balance sheet growth through long-term wholesale funding while the cost of this has been high," it said.

Global funding pressures had eased recently on the back of policy makers' efforts in Europe to inject liquidity into the financial system. New Zealand banks were now issuing longer-term debt in global markets, but at a cost that was still very high relative to pre-crisis levels, the Reserve Bank said. Despite this, developments in global funding markets remained a key risk for the banking system.

"Should offshore term debt markets be disrupted again, it is likely that New Zealand banks would again find it difficult to issue unsecured long-term wholesale debt," the Reserve Bank said.

"These pressures are potentially accentuated as around 20 percent of long-term funding will no longer qualify as core funding by the end of 2012. By the end of 2015, more than 70 percent of the current long-term wholesale funding - or NZ$38 billion -will no longer qualify," it said.

In a scenario where global term markets were effectively closed to New Zealand banks for a prolonged length of time, banks' core funding buffers would be progressively eroded. This could eventually see some banks under pressure to find alternative sources of stable funding to meet the minimum CFR requirement.

"While banks would be able to replace some, but not all, expiring core funding with issues of domestic long-term debt and covered bonds, they would likely need to obtain significantly more retail funding," the Reserve Bank said.

"However, much will depend on the outlook for credit growth over the next few years, and the extent to which the current inflow into bank deposits persists. Should credit demand pick up significantly, banks would find it difficult to respond by quickly increasing core funding in the current environment," it said.

"Retail deposit rates could be bid up further if banks compete vigorously for that source of funding."

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I guess that National Bank advertisement claim "Save for your ???? surprisingly fast"  just got a whole lot harder.
Equally we can 'kiss goodbye' to any RBNZ thoughts of moving towards tighter LVR mortgage issuance - it will take more than a life time to save the necessary deposit under any meaningful change in the regulations. Bring on 100% LVR plus 100 year mortgages.
It is increasing clear, as Jim Grant notes, the RBNZ has repressed all New Zealand investors and potential home owners into a high risk, high leverage shell game of buying houses. 
The attendant moral hazard is highly repugnant. We need a regulatory body to oversee the regulatory body.
The RBNZ's soothing projections of lower bank profits going forward are just nonsense. It exerts no better control than turning a 'blind eye'. 

Agreed that saving the deposit at a lowered LVR (higher deposit) is a problem. However this is a one dimensional view. The supply-demand balance is more important. If changes could lower the price to income barrier the result is partly solved.
Building costs will continue to rise but site costs  and floor area are both flexible as demand eases.
There are many factors affecting demand and decreasing immigration would help immensely as would constraints placed on overseas domeciled ownership, if a government has the nous and the guts to do it. Both are in short supply with this Government and most of those for the last forty years