RBNZ Increases Pressure on Banks to Lower Mortgage Lending Rates

(Bloomberg) -- New Zealand’s central bank is pressuring retail banks to lower mortgage rates, saying they have been too slow to pass on monetary stimulus.

“We are watching and we are conscious that there is more scope for those interest rates to fall, and we would expect that to happen,” Reserve Bank chief economist Yuong Ha said in a webinar broadcast Thursday in Wellington. He’s the latest policy maker to make the point following comments from Governor Adrian Orr and Deputy Governor Geoff Bascand this week.

The RBNZ is using a NZ$60 billion ($37 billion) bond-purchase program to lower wholesale interest rates as the economy enters a recession following the coronavirus pandemic. It wants banks to transmit that stimulus to the public via lower borrowing costs, which should encourage spending and help to prop up the housing market.

The pressure appears to be having some impact, with banks starting to lower fixed-term mortgage rates in recent days. ANZ Bank New Zealand yesterday announced a one-year fixed home loan rate of 2.79%, a fresh historic low.

Ha said the RBNZ’s bond purchases have succeeded in lowering government bond yields by 80 to 100 basis points, but fixed mortgage rates have fallen only 20 to 30 basis points in response.

“The pass-through from lower wholesale rates to lower retail rates has been slow and partial,” he said. While it was not the RBNZ’s job to tell banks where to set retail interest rates, “what we can do is highlight where we think that transmission process seems to be taking longer” and “just make people aware of it.”

The RBNZ expected to see further declines in retail rates “in the next little while” as competitive forces came to the fore, he said.

Ha reiterated that the central bank doesn’t expect to cut the official cash rate below its current level of 0.25% this year.

“We expect to hold it there for the next 12 months, until March next year,” he said. “We’re not planning on taking it lower at this stage, simply because the banking system is not ready for lower OCR rates at the moment. We’ve given the banking system until the end of the year to get ready so that the option is there for the Monetary Policy Committee in a year’s time.”

However, he said the MPC has “the ability to continue to monitor, revise, reassess and re-evaluate our decisions and the effectiveness of our decisions and do whatever it takes to get us back to our medium-term objectives.”

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