5 Dec 2008

Bollard puts pressure on banks to ease pain

5:59 am on 5 December 2008

The Reserve Bank governor is calling for banks to make sure they bear some of the pain other New Zealanders are feeling in the current economic downturn.

Alan Bollard made the comment after the central bank cut the Official Cash Rate by an unprecedented 1.5 percentage points to 5% on Thursday.

The rate is now at its lowest level in five years and was previously 6.5%. It is now 3.25 percentage points lower than in July.

Dr Bollard said the economic situation remained volatile and he is happy the central bank still has room to cut rates, should the outlook worsen.

Banks dropped their interest rates on Thursday in response to the record cut. But their rates have not fallen as steeply as the benchmark rate, and their cuts are mainly for floating rates or short-term fixed rates.

Many mortgage holders will be unaffected by the latest lending rate cuts, as they are on on fixed mortgage rates of up to five years.

And people with money in bank deposits for their old age will find they have less income as the interest rates come down.

Dr Bollard says he is pleased that banks have started lowering rates, but they have further to go. He warned that banks cannot use Thursday's OCR announcement to build up their profit margins.

Banks move to cut rates

ASB bank was the first to move on Thursday, announcing it is cutting its floating lending rate from 8.7% to 7.55%.

SBS Bank has dropped its floating home loan rates by 195 basis points to 7.20%.

Kiwibank cut its floating rate to 7.45% and its one-year rate to 6.49%.

The Bank of New Zealand repriced its floating mortgage rate to 7.75% and its six-month fixed rate to 6.49%.

Westpac reduced its fixed lending rates by between 0.25% and 0.55%.

Ongoing financial turmoil

Dr Bollard cited ongoing financial market turmoil and a marked deterioration in the outlook for the world economy.

The New Zealand economy is in recession and is expected to keep shrinking until at least the middle of next year. Business confidence is at its lowest level in 20 years, building consents have hit a record low, while unemployment is expected to rise

Dr Bollard highlighted stubbornly high domestic inflationary pressures, particularly in local body rates and electricity prices, but said conditions were now in place for a return to solid economic growth by the middle of next year.

He expressed increased confidence that inflation would return to between the target band of 1% to 3% by then.


Economists say the bank's forecast for the cash rate to settle at 4.5% by the end of next year may be too optimistic, given the worsening global finanical outlook.

Finance Minister Bill English believed Thursday's cut in the Official Cash Rate would help the economy. He said together with tax cuts next year and the Government's stimulus plan to boost infrastructure spending, the Reserve Bank's move will take the hard edge off the recession.

Labour Party finance spokesperson David Cunliffe said it is good news for borrowers.

He reiterated the central bank's call for financial institutions to pass on lower rates, saying many mortgage holders are on fixed terms and it will take time for the benefits to flow through.

The Federation of Family Budgeting Services said the cut is good news for mortgage holders.

However, it believed it would be depressing news for people who will not get as much interest on their savings, particularly those who have joined KiwiSaver.

Federated Farmers welcomed the Reserve Bank's announcement, but said banks need to pass on lower interest rates to businesses and farmers to keep some stuimulus going in the economy.

It said reductions of 3.35% in the Official Cash Rate since July have not been reflected in farmers' overdraft interest rates.