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TD rates can't go higher: Westpac

New Zealand banks can't lift their retail deposits much further despite offering significantly higher interest rates, according to Westpac chief economist Brendan O'Donovan and senior economist Dominick Stephens.

Tuesday, September 28th 2010, 9:48PM

by Jenny Ruth

That means their mix of retail and wholesale funding is likely to change only marginally, they say.

The banks currently source about 45% of their funding from retail deposits with the balance sourced from wholesale markets and a significant portion coming from overseas.

The global financial crisis has made it more difficult and more expensive to raise funds on wholesale markets and recent Reserve Bank regulations also make retail funds significantly more attractive to banks than wholesale funds, the economists say.

"Consequently, banks have begun to compete more fiercely for retail deposits and this has driven up the interest rate paid on term deposits," they say.

The average six-month term deposit rate used to follow the Reserve Bank's official cash rate (OCR) quite closely but over the past year banks have been paying 200 basis point over the OCR for them.

"Despite this, there has so far been only a small increase in retail funds deposited." The economists estimate paying 200 basis points more increased retail funding just 4%. "Retail deposits are fairly unresponsive to higher interest rates."

Read Westpac's full report here

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