RBA sees policy limits play out in New Zealand amid bank squeeze

An interest rate cut by the RBA would give little respite to homeowners and businesses that have already seen borrowing costs begin to rise, if this month's policy easing in New Zealand is anything to go by.

Australia's big four banks, which raised raised home loan rates last year and increased borrowing costs for businesses in February, also own the largest lenders in New Zealand. And so far none of them has passed on to Kiwi household borrowers the full 25 basis points of surprise stimulus delivered by the Reserve Bank of New Zealand last week.

First-home buyers are often priced out of the established housing market.
First-home buyers are often priced out of the established housing market. Photo: Ken Irwin

The RBA has left the door open for further easing as it supports investment and consumer spending in an economy weighed down by the end of a resources boom. Yet the banks face higher bond market costs and aren't feeling generous after raising a record $20 billion in equity last year to meet stricter capital requirements. They will increase interest rates and might not pass on any potential RBA cuts in full, according to Brisbane-based fund manager QIC.

"We have a view the banks will increase rates independent of the RBA before June as costs rise," said Katrina King, director of research and strategy at QIC. "That will make the RBA's work much heavier."

Bets on rate cut

QIC expects the RBA to cut its benchmark rate in the second half of the year, she said. Traders are pricing in a more than 80 per cent probability that the central bank will reduce its cash rate to 1.75 per cent from an already record low 2 per cent within the next 12 months, according to swaps data compiled by Bloomberg on late Tuesday afternoon.

Policy makers judged at their meeting on March 1 that it was appropriate to leave the cash rate unchanged at an accommodative setting as the economy rebalances away from mining-led investment, according to the RBA's minutes released on Tuesday. They reiterated that continued low inflation would provide scope to ease monetary policy further, if needed.


The RBA also noted that markets had been volatile after the Bank of Japan's January decision to implement negative interest rates and "there appeared to be more uncertainty about the direction and potency of monetary policy in the major jurisdictions."

ANZ Bank, the Commonwealth Bank of Australia, National Australia Bank and Westpac collectively account for 77 per cent of outstanding loans in Australia, according to regulatory data. Their subsidiaries control more than 80 per cent of the New Zealand market.

History repeated

In the days following the RBNZ rate cut of 25 basis points, the New Zealand units of ANZ and Westpac dropped their variable home loan rates by 10 basis points, while Commonwealth Bank's ASB Bank reduced theirs by 20 basis points, according to statements from the lenders. Bank of New Zealand, owned by NAB, hasn't moved as yet, according to an e-mailed statement.

Their reaction was a repeat of what happened here last May, when the banks passed on only a part of the RBA's cut for the first time since 2012. Three of them went on to increase costs for propery investors in July and all four followed with a variable mortgage rate increase in October. They also raised business lending rates last month, citing increased regulatory and funding costs.

The average yield premium over the swap rate on financial company bonds in Australia climbed to 114 basis points this month, a level unseen since July 2013.

'Little room'

The big four saw their net interest margins, a key measure of lending profitability, fall to the lowest in at least eight years in 2015 amid increased competition and rising funding costs. Rate increases by the banks helped them arrest the decline toward the end of last year.

The banks' spokesmen declined to speculate on interest rate movements.

"If there is another RBA cut, I don't see the banks matching it in full as their costs are already elevated," said T.S. Lim, a Sydney-based analyst at Bell Potter Securities. "They have managed to stabilise margins by increasing rates and they have very little room to risk it."