Tax cuts blamed for mortgage rate rises

Big banks are pushing up some fixed mortgage interest rates and deposit rates, blaming bigger-than-expected tax cuts announced last week.

But the Government says the banks have over-reacted and says the size of the tax package should not push up interest rates.

Sister banks ANZ and National pushed up one-year fixed rates from 9.4 per cent to 9.8 per cent, while six- month fixed rates rose to 9.95 per cent. KiwiBank also lifted its two-year rate to 9.19 per cent.

Some term deposit rates rose as much as half a per cent to 8.5 per cent for six months at National Bank.

The banks said they had changed deposit and lending rates after a rise in wholesale interest rates. Those rates rose sharply after Finance Minister Michael Cullen announced a four-year tax package worth $10.6 billion.

The banks also trimmed their three- to five-year lending rates by 15 basis points to 9.35 per cent. However, ASB Bank had already trimmed its three- year rate to 9.2 per cent, undercutting ANZ and National.

The most popular two-year fixed rates were held at 9.4 per cent, but bank sources suggested those rates could also move up soon, undoing a fall early this month when big banks trimmed two-year fixed rates from about 9.7 per cent to 9.4 per cent.

They cut their two-year rates soon after state-owned KiwiBank chopped its rates to 8.99 per cent.

Yesterday KiwiBank moved that two-year rate back up to 9.19 per cent, though it was still the lowest in the market. Fixed-term lending rates were lowered because some banks had expected official interest rate cuts as soon as next month.

The bigger-than-expected tax-cut package announced last week, worth $10.6 billion over four years, meant the Reserve Bank would probably hold official rates up till December, to keep a lid on rising inflation, stoked by more money in people's pockets.

High interest rates and rising petrol prices are sucking money out of other spending and adding to predictions that house prices will fall at least 10 per cent this year.

Some economists say latest business confidence surveys suggest the economy may be going into a recession, but even so the Reserve Bank will remain worried about inflation rising toward 4 per cent or more. A recession would mean the overall economy was shrinking in the first half of the year, with fewer new jobs, higher unemployment, and flat or falling shop sales.

A spokesman for Dr Cullen said yesterday the Government was confident that the tax package had been designed responsibly. The first year of cuts had been kept at $1.5 billion - a figure that the Treasury and the Reserve Bank had factored into their forecasts. The next round would not take effect till 2010 to avoid stoking inflation.

On Sunday, Dr Cullen accused banks of talking up tax cuts as inflationary out of self-interest, as they had punted on interest rates staying up next month.

"They have every self-interest in ensuring that doesn't happen."

- © Fairfax NZ News