26 Jun 2009

New banking rules predicted to push up interest rates

6:32 pm on 26 June 2009

An overhaul of bank funding rules is likely to push interest rates to households and businesses, according to one major banks.

The Reserve Bank is expected to next week announce the new rules, designed to shore up the banking system and lessen the chances of a banking collapse in New Zealand.

Banks will have to raise more money from local depositors, and from all investors for longer periods of time.

Westpac economist Michael Gordon says the move will push up the cost to banks of raising money, which will inevitably be passed on to homeowners and businesses in higher interest rates.

Of the banks, TSB Bank has the lowest two-year fixed mortgage rate and funds its borrowing only from within New Zealand. It says it is too early to know whether banks will be able to absorb the cost of the new roles.

TSB Bank chief executive Kevin Rimmington says any move to require more domestic funding will push up deposit rates.

Kiwibank says the changes are logical and it is largely supportive, but it does not wish to speculate on what effect it will have on interest rates.

Council of Trade Unions economist Bill Rosenberg says the Reserve Bank should increase the phase-in period for the new rules.

He says the Reserve Bank could also provide some interim funding lines, to help banks lengthen the terms at which they borrow money.

The Employers and Manufacturers Association says New Zealand banks are in good shape and the new rules and resulting higher interest rates are unwanted.

Bank customers will begin to see the effects of the new rules as banks pay back their own short term loans and replace them with longer-term borrowing over the coming months.