Have your say: Why aren't the banks passing on the OCR cut?

Almost 4 days have passed since the Reserve Bank cut the Official Cash Rate by 50 basis points to 2.5% and the banks have cut virtually nothing. Westpac cut its 6 month mortgage rate by 40 basis points to 5.39% on Thursday morning and Rabobank cut its farming variable rate by 50 basis points shortly afterwards. Our Mortgage rates table, which would normally show a sea of rates changes after an OCR cut, shows only a few changes by small institutions.  Wholesale interest rates known as swaps rates for 1 and 2 year terms fell by around 20 basis points on Thursday and Friday. The interactive charts for this are below. Banks watch these wholesale rates closely before announcing cuts. Since Thursday there has been an ominous silence from almost everybody. What are the banks waiting for? Or have they decided not to pass on the rate cuts? Adam Bennett in the New Zealand Herald has reported that anger is building about rates not being cut in the wake of the move.

Meanwhile, readers' views posted on Herald Online suggest many people believe banks are not passing on OCR cuts sufficiently. That view has been backed by bank workers' union Finsec, whose general secretary Andrew Casidy on Thursday called for the banks to open their books so customers can see how much their bank is making from home loans. "Banks should disclose their costs of borrowing and the interest rates they charge to the Reserve Bank, who could then publish this information in a comparative table," said Casidy. "Customers could use this information to decide if their bank is being fair in what they charge and how this stacks up against other banks."

What I think It's possible the banks are hoping they won't have to cut rates and are waiting for someone else to jump first. They're doing this because their profits are under intense pressure from falling profit margins on borrowing and lending both locally and internationally, and because they face higher bad debts. Contrary to the kneejerk reaction from some unions and lobby groups, including Federated Farmers, banks are not gouging profits. Adam Bennett's story, and the comments from Casidy, suggest that the banks do not disclose enough data on their profitability to know whether they are gouging. This is simply not true. I am so definite on my views on this because I have researched the banks general disclosure statements and the two bank results through so far from the March quarter. I wrote an analysis on this two weeks ago called "Bank profits on interest rates are falling, not rising". The table here shows profits on interest rates are falling for all the major banks except Kiwibank. Last week BNZ said its net interet margin fell 12 basis points to 2.23% in the first half of the fiscal 2009 year to March 31 from 2.35% in the previous half year and 2.49% in the same half a year ago. BNZ CEO Andrew Thorburn told interest.co.nz in an interview that margin pressure was focused mostly on the deposit margins, where banks were competing hard for domestic deposits. The cost of the retail deposit guarantee scheme also squeezed margins slightly. See the full BNZ results and commentary in this PDF presentation (NZ material pages 30-34) Last week ANZ National reported its net interest margin for its New Zealand businesses fell 24 basis points to 210 basis points in the six months to March 31 from the same period a year ago. It was down 9 basis points from the September half. Here is the full presentation from those results. The New Zealand pages are 63-66 and 85-91. Also see here in this presentation pages 68-69, which detail the margin contraction. The next question is: should the banks be sacrificing profits to improve the New Zealand economy? Finance Minister Bill English said last month banks should accept lower profits and they owed New Zealand because of the deposit guarantee.  Reserve Bank Governor Alan Bollard has said the banks should be "playing their part". Anyone taking a view on this has to decide whether the banks are an arm of government because of the guarantee or whether they should be sacrificing profits to protect their brand and their customers in the long term. The brand and customer protection line could be argued. The 'defacto government ownership' line is much harder to argue. The banks already pay for that guarantee. But it can't be argued that banks are not passing on the OCR cuts on the grounds they are padding their profits. This is simply not true. However, I can't see any reason why the banks have not passed on the OCR cut for variable mortgage rates. If they are matching their funding costs with their lending costs and not cross subsidising across their sources of funding then they should pass on the cuts to floating mortgages. One reason may be they can't pass on the rate cuts to term depositors, who will simply not accept lower interest rates. It certainly looks like we've hit the bottom for interest rates, whether the Reserve Bank or the Government or the bank unions like it or not. Your view?