The Government is warning banks they should trim their expectations of making high profits during the recession.
Retail bank interest rates on fixed, longer-term home loans have risen a full percentage point in the past two to three weeks, despite the Reserve Bank's fierce cuts to its benchmark rate.
Finance Minister Bill English says banks have traditionally made high profits, but now the Government is taking on more risk through guaranteeing deposits and raising money from overseas.
For this reason, he says, banks should understand that their margins should not be the same as they have been in the past.
However, Massey University banking lecturer David Tripe says that regardless of what they expect, banks are in fact earning less profit in the current financial environment and he does not expect that to change in the near future.
Reserve Bank statement
In a statement issued on Wednesday morning, the Reserve Bank said it believed recent rises in longer-term interest rates were inconsistent with its monetary policy outlook.
The bank is projecting interest rates to remain at relatively low levels for an extended period. Reserve Bank governor Alan Bollard said that if this apparent distortion persisted, it could put unnecessary pressure on the cost of borrowing by firms and households.
The main trading banks have raised three-year to five-year fixed mortgage rates by about one percentage point in the past fortnight in response to rising interest rates on local money markets.
Following the Reserve Bank's comments, money market interest rates fell across the board. On Wednesday, two-year and five-year interest rates fell by between 0.2 percentage points and 0.3 percentage points.
The dollar also fell about one cent against the US currency on Wednesday but regained ground overnight, to 56.2 US cents just before 7am on Thursday.
The banks have said they want to see more evidence that money markets will keep interest rates down before passing on the falls to lower mortgage rates.
They say the surge of people wanting to lock in mortgage rates at a time when money is short in supply has been driving up rates.
