Interest rates 'unlikely' to fall

VERNON SMALL
Last updated 05:00 16/06/2012

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Borrowers holding out for lower floating mortgage rates are being warned they are unlikely to fall unless there is a major crisis in Europe that triggers a cut by the Reserve Bank.

Reserve Bank Governor Alan Bollard this week held the official cash rate at a record low 2.5 per cent, but pointed to a "small but growing risk" that conditions in the euro area would deteriorate more sharply than the bank had predicted.

He was monitoring the situation closely, given the potential for rapid change – interpreted as a sign he stood ready to slash the cash rate by 50 basis points in a crisis.

Fixed rates have been steadily falling in recent months. The lowest was Kiwibank's now discontinued special 4.99 per cent one-year fixed rate but most banks are offering one year fixed rates of 5.25 per cent.

However, that is lower than floating rates which are mainly between 5.65 and 5.75 per cent and have been stable while fixed rates have fallen.

Banks have been under pressure to cut rates as competition heats up, with some customers successfully getting better rates by threatening to switch banks.

Kiwibank chief executive Paul Brock said yesterday it was possible the floating rate would fall, but it was likely to need a trigger.

"It is possible that it could go lower, but you would have to see a big push from the Reserve Bank and a real big issue in Europe ... and then the Reserve Bank's response to that ... to actually say we have to cut rates and be more stimulatory in New Zealand before floating rates would drop," he said. "My view is we are going to see some quite low fixed rates for some period but at the same time the floating rate is quite low and will continue, according to the governor, to stay there for some time as well."

Greece goes to the polls this weekend in a vote seen as key to whether it stays in the euro common currency. An exit could spark a sovereign debt crisis which could spread to other European countries and trigger a world-wide slowdown.

Mr Brock said if there was an offshore crisis Kiwibank would be able to "stand in the cycles" and continue to lend. Kiwibank mostly raised funds inside New Zealand, and if there was a crisis offshore it would be better placed to stand by the country than overseas-owned banks.

If there was a crisis "the question then is where do foreign-owned banks focus their interests? And would they really focus them on those markets where they don't have those opportunities? So Kiwibank then comes into the fore to keep in my view the others honest – to make sure we continue to lend in difficult times and we continue to stand by New Zealand."

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That had shown up in the global financial crisis, when in the last three months of 2008 Kiwibank accounted for 89.7 per cent of all new lending by registered banks.

"If we can build a bank that is funded differently and operates differently to the others then we can stand in the cycles – when other banks respond in a certain way, we want to respond by standing by New Zealand."

He said Kiwibank's share of the mortgage market was now more than 6.66 per cent, with about 60 per cent on fixed rates and 40 per cent on floating.

- The Dominion Post

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