Farmers prepare to square off against banks

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Federated Farmers is preparing to square off against the four major banks over the disparity between farm and residential mortgage rates.

Monday, July 6th 2009, 9:59PM 3 Comments

by Paul McBeth

The lobby group is seeking to meet with the banks to "argue there is scope for immediate interest rate reductions, especially in the floating category," said economics spokesman Philip York. It supports the Reserve Bank's view that floating mortgage rates are "unusually high"

The move comes after a central bank report backed away from criticism over fixed-rate loans, although stated there was still room for lenders cut floating-rate products.

"Farm mortgages are arguably the safest form of business to lend against," York said. "We look forward to discovering what proportion of banks' farm business customers are paying the same, if not less, than residential customers."

The Feds joined politicians, labour unions and manufacturers in airing disappointment over Parliament's decision not to pursue an inquiry into banking sector funding costs and margins.

Lending rates have proved a contentious issue for banks, amid criticism they haven't passed on all of the central bank's 575 basis points of cuts to the official cash rate since July last year. The banks have been at pains to explain how funding costs for much of their lending books are driven by overseas rates and the need to compete for deposits against government-guaranteed finance company offerings.

In a report on bank funding costs and margins, the Reserve Bank of New Zealand concluded a large part of its cuts to the official cash have been passed on to households and businesses. Still, the spreads between marginal funding costs and floating mortgage rates have widened in recent months to "historically high levels." The RBNZ said it is continuing to have discussions with lenders about their funding and pricing.

The RBNZ estimates about 100 basis points to 150 basis points of the OCR cuts have been offset by higher marginal funding costs for deposit and wholesale funding.

Finance companies are now lobbying the government to make its decision on whether to extend the retail deposit guarantee scheme, set to expire in October next year, amid concern the cut off will distort pricing.

Parliament's Finance and Expenditure Committee this month decided against pursuing an inquiry into retail interest rate margins after National, ACT and Maori Party MPs shot down the proposal. The government softened its stance on mortgage rates after the major banks defended their positions, and the FEC backed down on threats to launch an inquiry into banking practices.

The committee also decided by majority against initiating an inquiry into the relationship between the OCR and short-term interest rates after a briefing from the Reserve Bank.

The RBNZ recently announced its new prudential liquidity policy, which sets minimum liquidity levels for lenders to maintain. The central bank said the new liquidity policy isn't expected to have a significant further impact on banks' cost of funds because some are already meeting the required core funding ratio and the rest will have a two-year transition period.

Paul is a staff writer for Good Returns based in Wellington.

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