Why are the banks not passing on the 0.25% cut?
There are many factors involved, but we will focus on one of the key ones – which is the way Kiwi spending habits influence New Zealand banks. On average, our banks get 25–30% of the money they lend (and have lent out already) from foreign savers. As a nation we tend towards spending now rather than later – and our savings are small as a result. So our continued spending is ultimately at the mercy of these overseas investors who keep the banks flush.
In recent times, however – in the wake of the GFC and shifting economies globally – the foreign savers have become less willing to continue with New Zealand investments. This is resulting in concerns around ‘credit spread’ as the money lent out comes up for renewal. Currently, that 25%+ portion of lent-out money up for renewal is costing a 2% margin above its New Zealand equivalent rate – as opposed to a 1% margin a year ago.
Through the worst parts of the GFC, the credit spread was at around 3% – and before the GFC is was sitting at around 0.2%. So even though things are not quite at the same point as they were during the GFC, they are still significantly changed from their ‘original’ state, which explains why many areas of our financial relationships have changed since 2008.
Because of the rise in funding costs, there have correspondingly been recent increases in bank retail lending rates for homeowners and businesses in Australia and New Zealand, with no increase in the official cash rate to match. The rise of credit spending has been one of the major factors in the recent OCR cut – with the Reserve Bank seeking to offset the impact of the rate rises that were already underway.
It’s worth noting that not all banks have that same 25%+ overseas funding proportion. Some of the smaller banks with small lending books but large local investors don’t dabble in offshore funding at at all. For these institutions, funding cost rises have been less aggressive, and as such they are in a position to cut their floating rates per the OCR cut without any major margin impact.