Banks need to man-up and cut rates

Calculating Interest Rates

Chatter over last week’s surprise cut to the official cash rate by Graeme Wheeler continues to rumble on.

Most people, including yours truly, figured a cut would come on June 9, but the Reserve Bank governor unexpectedly sliced a quarter of 1 per cent off the OCR, taking it to an historic 2.25 per cent.

There’s firm talk of at least one more cut in the pipeline, and whispers of the OCR going below 2 per cent — will we see the OCR drop to 1.75 per cent by Christmas?

However, it seems the days of the OCR having a direct effect on floating mortgage rates are over. With banks drawing on foreign cash to make loans, they have the perfect excuse not to pass on the savings Wheeler hoped would help businesses and floating rate mortgage payers.

The theory is that if people pay less in bank interest, they’ll spend the money saved into the economy (instead of using their credit card), or reduce their debts.

Following the cut, the ANZ reduced its floating rate by just 10 basis points (to 5.64 per cent), the BNZ kept its floating rate unchanged at 5.79 per cent, and ASB reduced its rate by 20bps to 5.55 per cent. The Co-op is the only bank, at the time of writing, to pass on the full cut to its borrowers — its rate is 5.45 per cent.

If banks won’t play ball, then the RBNZ’s ability to massage the economy via the OCR are over. Wheeler even made it pretty clear he expected the banks to pass on the full cut, but they have ignored him.

While the banks should be free to absorb any rises in the OCR to stay competitive, they should pass on any cuts in full. It’s what the Reserve Bank governor wants, and it’s what borrowers want.

High demand

According to the latest Harcourts Market Watch newsletter, 80 per cent of homes taken to auction are selling, and that demand has pushed the real estate firm’s average Super City home sale price to $899,445.

Harcourts’ CEO Chris Kennedy says:  “The central region has 40 per cent less stock than was available last year, and average prices are up 29 per cent. It’s your classic supply and demand situation.”

In Christchurch, based on Harcourts’ figures, prices rose from $437,630 to $509,534 in the 12 months to February.

Fixed rates

HSBC is the only bank offering a fixed rate at below 4 per cent, but I’m hoping we will see plenty of other banks following suit this year. Until then … some of the best deals include ASB’s 4.15 per cent for one year and KiwiBank’s 4.99 per cent for five years.