ANZ and ASB see it being cut as low as 1.75% by the end of the year. However, not all of the surprise cut was passed on to floating rate borrowers and initial signs are that banks are keen to hold on to some of the fall in interest rates to bolster their net interest margins. ANZ, Westpac and BNZ only passed on 10 basis points of the 25 basis point cut to floating rate borrowers. They argued that their costs of foreign funding were higher, but there’s debate about that. The Reserve Bank said the effect was only mild and they expected all of the 25 basis points of cuts to be passed on to floating rate borrowers. ASB and Kiwibank passed on up to 20 basis points of the cut, while Co-op Bank and HSBC passed it all on.
Banks have put their margins under pressure over the last year with aggressive discounting in fixed rate mortgages, but the prospect of hefty losses from dairy lending may be forcing the banks to blunt some of their sharper prices. Wholesale swap rates fell 20-25 basis points after the rate cut, increasing the pressure on banks to pass some or all of it on to fixed rate borrowers. The initially subdued response from the banks may force the Reserve Bank to cut the OCR even further to get the ‘bang for its buck’ it needs to meet its inflation target. A surprising rebound in the New Zealand dollar to 2016 highs of 68.5 USc will also increase the pressure for more rate cuts. The US Federal Reserve lowered its forecast for interest rates in the week after the Reserve Bank cut, which added yet more impetus for lower rates globally and weakened the US dollar.
Dairy prices also kept falling through March as European dairy farmers continued to increase production. Europe removed its quotas on dairy exports last April, unleashing a wave of new production. The European Commission even announced new subsidies in March to allow continued over-production. The Reserve Bank’s initial reluctance to cut was also soothed by a further slowing in Auckland’s housing market, although activity and prices outside of Auckland continued to surge. Prices and volumes were broadly flat in Auckland in February, although the jury remains out on whether the slow-down over the summer is more than temporary. Data from March due in April will give a better indication.
Meanwhile, despite the latest dairy slump and slower global growth, the New Zealand economy is still trucking along with GDP growth of over 2.5% and jobs growth of 1-2%. A record summer for tourism, robust consumer spending and plenty of construction in Auckland and Christchurch are keeping people working, earning incomes and paying their rents and mortgages. Low petrol prices, high migration and plenty of equity in house values are helping to fuel spending and jobs growth in most cities. The bottom line: The Reserve Bank surprised most with a rate cut on March 10 and could cut again as early as April 28. Inflation remains weak and deflationary headwinds continue to blow from the rest of the world, pushing down on interest rates. The big four banks have initially been reluctant to pass on the bulk of the rate cuts to mortgage rates, pointing to higher foreign funding costs, although the Reserve Bank is skeptical.