By Gareth Vaughan
With Reserve Bank Governor Graeme Wheeler's finger seemingly poised to push the "hike the Official Cash Rate" trigger on March 13, those with mortgages are being told to prepare for rising interest rates.
(Here's David Hargreaves' on what rising interest rates might mean for those with a mortgage. And here's Bernard Hickey's coverage of last week's OCR review here).
Just as borrowers brace themselves for rising interest rates on their mortgages, savers with bank deposits ought to be rubbing their hands with glee in anticipation of higher interest rates.
The Co-operative Bank got the ball rolling on Friday, lifting its six-month and one-year carded term deposit interest rates to rates among the best in the market. Co-op Bank's CEO Bruce McLachlan told me a significant number of customers had moved money over recent months from term deposits to on-call savings products. This was partly due to attractive on-call products, but also because of publicity around likely interest rate rises, he suggested.
"They (depositors) have been managing their interest rate exposure by bringing more of their deposits shorter in the short-term expecting a rise. We've certainly seen that," McLachlan said, adding increases in term deposit rates this year should track the expected 125 basis points rise in the OCR fairly closely.
A hand brake?
But a hand brake on how far and how quickly deposit rates rise could be the fact the major banks don't need floods of cash right now. Banks simply aren't under much, if any, funding pressure thus a deposit price war appears unlikely.
Despite the low interest rate environment of the past few years money has poured into bank deposits. Reserve Bank data shows total household deposits - in the New Zealand dollar - rose $35.4 billion, or 41%, in the five years to November 2013 to $121.266 billion.
The all important Reserve Bank enforced core funding ratio, under which banks must secure funding for at least 75% of their lending from equity, retail deposits, and wholesale sources such as bonds (including covered bonds) with durations of at least a year, is at 85% across the sector, giving banks a good buffer.
And banks have been getting their funding fairly cheaply. According to KPMG, the average interest rate a bank paid for all its funding was an annualised 3.64% in the June quarter of last year. That was down from 3.80% in the December quarter of 2012, which had been a five-year low. And in its December Monetary Policy Statement the Reserve Bank itself said; "Access to funding (for banks) is easy and pricing is about as low as it has been since the global financial crisis."
On the other side of the ledger lending growth is steady, but not spectacular. The latest Reserve Bank sector credit data shows agriculture debt up 3.4% in 2013, business debt up 3.5%, housing loans up 5.9%, and consumer debt rising 3%. And the Reserve Bank's restrictions on banks' high loan-to-value ratio home loans have seen that type of lending slashed from more than 25% of new lending last September to just 4.7% in December.
Hence the offers of cash and refinancing costs (lawyers fees etc), if you switch your mortgage to a new bank. Competition in the mortgage market is running hot. So even if Wheeler does indeed pull that trigger, competition might, I emphasise might, act as a brake on rising mortgage rates.
It's the future not the past that matters
In terms of their lending growth, it's the future outlook, not the past performance, that banks will focus on. McLachlan points out lending to businesses should rise this year with business confidence at a 20 year high and decent economic growth forecast.
But with the OCR still at its record low of 2.50%, even if Wheeler begins a long cycle of OCR hikes and banks realise they do need a flood of new deposit money, deposit rates won't get back to the heady days of six to seven years ago in a hurry. Current average bank term deposit rates of about 3.2% for 90 days, about 3.82% for six months, and around 4.04% for 12 months, are well down on 7.68%, 8.5%, and 8.7%, respectively, which were peaks reached in 2007-08.
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