Reserve Bank Governor Adrian Orr is calling on banks to lift deposit rates as much as they have lifted mortgage rates, saying their tardiness is boosting their profits and preventing the benefits of the higher Official Cash Rate (OCR) flowing to savers.
Orr also used the opportunity of his first news conference since late November to criticise the big four banks' efforts on inclusion and resilience, pointing to the problems many residents in the remoter areas of Te Tai Rāwhiti, Northland and Hawke's Bay have had getting cash and/or using EFTPOS networks for essentials, largely because of a lack of branches, ATMs and networks able to work independently of mains power.
Orr's comments on deposit rates lagging mortgage rates were echoed in the Reserve Bank's Monetary Policy Statement, which accompanied an as-expected 50 basis point hike in the OCR to 4.75%.
"Deposit rate increases continue to lag the increases in wholesale and mortgage rates, resulting in a further widening of bank margins between lending and deposit rates," the summary of the Monetary Policy Committee meeting recorded.
"The Committee expect deposit rates to increase over the coming year incentivising savings, further dampening inflation and supporting the maintenance of current mortgage rates for a longer period."
Term deposit rates have risen around 350 basis points to around 4.5% since the OCR began rising in October 2021, while mortgage rates have risen by around 400 basis points to 6.5%.
Orr made a point of calling out the banks in his opening remarks.
"I think it's important that it's understood what we are calling out across the banks as they have been very quick to increase the mortgage lending rates, but deposit rates have lagged behind, and bank margins are holding up," he said.
"Higher deposit rates are a critical part to encourage savings which takes inflation pressure out of the economy."
In its interim financial results last week ASB reported a 33 basis points net interest margin rise to 2.52%.
Gabrielle exposes banking exclusion and resilience issues
Orr was also critical of the the banks' moves to shut branches and remove ATMs in remote regions, along with not having back-ups for when power went down.
"I'm seeing and reading some horrific stories out there at the moment of isolated communities, when people lose the ability to transact, when they don't have a means of exchange, social cohesion ends very quickly," Orr said.
"So these are vivid reminders right now, of the importance of resilience through the system," he said.
Orr said financial inclusion was a relatively new role for the bank, along with stewardship of the banking and transaction systems, particularly around the role of cash.
"That is the work we have to do with banks, and with the cash in transit firms around ensuring that 'just in time' doesn't dominate 'just in case.'
"The bank has been publishing on this work for the last two years or so around our future of money work. And part of that is whilst people say I don't use cash, daily or regularly, some people only use it, and all of us use it sometimes.
"This is one of those times those people needed to use. So financial inclusion sits with us. It sits with the Financial Markets Authority, but it sits with the banks as well around their social licence to operate."
Orr said the bank had been particularly busy in the last week with ensuring cash was distributed and ATMs worked.
"Outside of the Monetary Policy Committee, the bank has been primarily involved in making sure we have cash circulating in areas that do not have electricity or communication. There's nothing more distressing than seeing a cafe serving hot coffee, beside a bank whose ATM doesn't work. One had a generator. So it's these lessons around resilience.
"Operational risk is as important as financial risk or reputational risk.
We have been working for a couple of years around models with the New Zealand Bankers Association and testing banking hubs and different ways of doing it. But we are far from being there."
46 Comments
"Higher deposit rates are a critical part to encourage savings which takes inflation pressure out of the economy."
Might seem like a good point. But doesn't really mean much when at least 50% of h'holds have been living paycheck to paycheck, even before inflation. And arguably you need people spending like drunken sailors to keep the private sector afloat.
Yep. Beyond KiwiSaver, I don’t really save beyond putting a little bit aside for contingency. I’m sure that’s very common.
And yes I could save more if I ate out less (for example). But then life would be less fun and yes if that is done in aggregate restaurants etc will fail.
Slightly off topic , but : Prof Robert MacCulloch wonders how it is that in 2011 in response to the Christchurch earthquakes the RB dropped the OCR 50 bp , citing the effect upon the entire nation's economy ...
... yet in 2023 the RB raise the OCR 50 bp despite noting the ripple on effect of Cyclone Gabrielle on the entire nation's economy ...
In 2011 we had a govt that spent sensibly whereas now we have a govt that spends like drunk sailors.
A prime example is the $50M feasibility study for a cycle lane over the harbour bridge.
And who knows how much has been spent on building the tram line to the airport. Another white elephant that will likely get shelved.
Orr's comments on deposit rates lagging mortgage rates were echoed in the Reserve Bank's Monetary Policy Statement, which accompanied an as-expected 50 basis point hike in the OCR to 4.75%. - C'mon.
Not so long ago, he was saying increasing asset prices, including house prices, were a feature and not a bug in the bank's policy response to the pandemic because they make consumers feel wealthier and spend more.
Are fatter bank dividends paid to shareholder's bank accounts any different?
Time to be rid of bureaucrats believing they should be choosing winners and losers.
Robbo & Orr were in cahoots , exhorting us to borrow & spend ... keep the economy going at all costs ...
( each of them being utterly ignorant that the economy was perfectly fine , demand was robust , we didn't need the depression era economics they lavished upon us )
A question. As interest rates dropped house prices increased. Banks benefitted from the margin between cost of money and the mortgage rates sold. With the interest rates rising the banks should be still making the same margin. However if the amounts borrowed have increased markedly, are the banks not benefitting from their margin against larger loans thereby increasing profits?
lower margin on new debt due to falling asset prices.
Don't understand why lower margin on new loans?
New loans they have increased margin (as with ASB news by 0.33% ) . Their own explanation will be either that it's done to match inflation or to compensate for lesser volume of new loans created ..
Banks always wins.
Or we need political movement to expose banking basics to public!
Also the banks had LVR restrictions removed and the FLP to profit from simply taking money from the RBNZ and loaning to customers. Therefore banks have had double-dipped chocolate coated profits since 2020, and are now raising term deposit rates slower than mortgage rates.
This whole 'engineering recession' move is orchestrated by the US. Like the earlier Low interest regime for 7 years or so was orchestrated by them to come out of the recession, following GFC, etc. It is too political for a small country like NZ to resist and act independently.
Yeah, all the other Western central banks follow the fed. If we didn't the NZD would tank if our rates fell relative to theirs.
For various reasons I think the US can sustain higher rates better/longer than us, and so will be more committed to higher rates. For example, most US mortgages are fixed for the full term, so rising rates don't wipe out most of your home owners. And even for the ones that do have to sell, many mortgages in the US are non-recourse, so the bank takes the hit from the negative equity, not the borrower. Much more affordable at the ballot box.
Little NZ with it's floating and short term mortgages on full recourse is a cork dragged along in the ocean that can go under at any time, and nobody except us cares.
Give it a rest - $19.021bn of RP agreements hardly amounts to more than ~5% of bank loans to housing
And with the new definition of banks being asset purchasers by creating loan money, what's the role of deposits?
They are just a liability in it's literal sense.
I guess banks happy to create mortgage money and let the new money goes to other banks as deposits. That way they don't have to pay deposit interest and get mortgage interest.. Is banking these days this simple ?
"I'm seeing and reading some horrific stories out there at the moment of isolated communities, when people lose the ability to transact, when they don't have a means of exchange, social cohesion ends very quickly," Orr said.
"So these are vivid reminders right now, of the importance of resilience through the system," he said.
Orr said financial inclusion was a relatively new role for the bank, along with stewardship of the banking and transaction systems, particularly around the role of cash.
Be interesting to come back to these statements when they push CBDC’s.
So everyone needs 10 days water, gas for stove bbq, petrol for Genset and cash now...... you have been officially told.... Not sure this man Orr has ever been offshore sailing, lived rural etc.... as a kid in Hawkes bay our power was often off for a week.... gensets and ham radio where what I grew up on, CB radio in all cars.
Mr all powerful RBNZ, its goood the you are telling banks to boost deposit rates and people should save more.
Saver's are saving in a private bank with no guarantee of savings being protected by the RBNZ. Why are you so slow on insuring the savings public put out in these private banks?
Cash has no protection in this country and that's a big risk for Saver's. Why don't you implement that policy quickly and stop dragging the feet.
This should be a discussion topic in the upcoming current election.
Man this guy is really useless.. He took to long to raise rates when it was apparent the housing market was exploding. And now he is busy talking about how banks have closed to many branches and services in the regions... this has been happening for years and years and he waits until now to speak about the issue? We are all living with the consequences of Orr's incompetence.
Yup. He runs off $50b as part of the Covid response, triggers a real $9b loss for the Govt (that'd sure come in handy to rebuild the entire Hawkes Bay region right now) and then the only way to fix it is apparently inflict pain on individual households at a mortgage level?
Like how many failures or failed mandates are there in between what he did and what Kiwis are picking up the tab for? What have the consequences been there?
Does anyone know the Stats for population % that hold a mortgage? Is it enough people, that by raising interest rates to a huge level that it will actually slow inflation (if like they say most is overseas driven)? or will it only have the affect of slowing inflation by 1 or 2 %?
With inflation so high, real returns after tax are still negative, so in reality notwithstanding higher nominal rates, the settings are the same as they were during covid i.e. you need to take more risk or spend that money - you should not save money at the bank (which is what he was saying during lockdowns).
It's all very well Orr complaining about the gap between mortgage and saving rates, but why the heck don't you regulate? ASB's net interest margin of 2.52% is obscene. Compared with the average of 1.3% in Europe, you can see why our big 4 banks are some of the most profitable in the world. It's a loser game in NZ's economy whether you're a saver or a borrower.
We just require more competition - maybe force a break up? Notwithstanding this, Government needs to get out of business not regulate it.
The lack of asset growth and the FLP also have something to do with it but overall, the problem is there isn't enough competition and it's too hard to move your funds around without a lot of paper work.
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