RBNZ: Floating rates 'high'

Floating mortgage rates are "unusually high" at the moment, the Reserve Bank said today.

"We believe there is some scope for further reductions in these rates without compromising the viability of this lending," the central bank said.

The comments are contained in an analysis of interest rate margins released by the bank. "We have released this analysis to respond to a number of questions we have received regarding our stance on what room there still is for interest rate cuts," RBNZ Governor Alan Bollard said.

There has been raging debate about the level of our interest rates and whether banks are charging too much for mortgages. Parliament's finance and expenditure select committee decided not to hold an inquiry into bank interest rates last week after National, Maori Party and Act members of the committee voted against it.

The big banks are currently charging mostly in the range of 6.4 percent to 6.5 percent on their floating rates. This compares with the Official Cash Rate set by the Reserve Bank at just 2.5 percent, down from 8.25 percent a year ago.

"The spreads between marginal funding costs and floating mortgage rates have widened in recent months to historically high levels," the RBNZ said.

But while the floating rates seem too high, the RBNZ said it believed that the pricing of fixed rate mortgages was "reasonable" given the underlying cost of funds and taking into account the margins earned over these products over time.

"In contrast to many other countries during the global financial crisis, a large part of the OCR cuts have been passed on to household and business borrowing rates, reflecting the soundness of New Zealand banks," the RBNZ said.

The "marginal funding costs" for banks had increased relative to the OCR, which was due to both the costs of wholesale funding and deposit funds. "We estimate that these increased spreads have offset 100-150 basis points of the reductions in the OCR," the RBNZ said.

The central bank said it was continuing to talk to the banks to clarify recent trends in their funding costs and margins. "We will review these matters further in the Bank’s November 2009 Financial Stability Report."

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