Bank mortgage rates still at extreme levels

Most economists and the market expect the Reserve Bank will leave its Official Cash Rate (OCR) unchanged at 5.75% on Wednesday, largely because of the continued extreme weakness in global equity markets.

A Reuters poll conducted last Thursday showed 11 of the 13 economists surveyed expect no change.

The key question is: How the major home lending banks will respond?

Banks, generally, price their floating rates at between 150 and 200 basis points above the 90-day bank bill rate which is currently 5.86%.

All five of the major lenders are currently well above the extreme limit, National Bank the lowest at 7.95%, Bank of New Zealand at 7.99% and the other three at 8%.

Certainly, the government’s Kiwibank has seen an opportunity, slashing its floating rate from 7.10% to 6.95% even before the central bank’s decision. Chief executive Sam Knowles says his bank is following the market, given that the 90-day bills have fallen from 6.07% in mid-July.

David Tripe of Massey University says the major banks aren’t likely to move before Wednesday because they won’t want to be caught out if the Reserve Bank surprises the market with a rate rise.

While Kiwibank’s move "has an element of grandstanding," if there is no change in the OCR the major banks will be under pressure to lower their floating rates, he says.

"These rates are unrealistic. We should expect as a matter of course some rate reduction to occur next week," Tripe says.

Stephen Toplis, head of market economics at Bank of New Zealand, is one of the two expecting a rate rise next week, although he only rates the chances at 50%.

How the international equities markets and the New Zealand dollar perform over the next few days could swing the balance he says.

But he thinks the market is wrong to price in almost a zero probability of further rate rises this year. Among his reasons are that unemployment is at a 14-year low, consumer confidence is at an 11 year high, retail sales remain strong and inflation is still near the top of the Reserve Bank’s zero to 3% target.

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