Reserve Bank warns bank funding costs and interest rates could rise due to global market turmoil, but says NZ banks OK for now

New Zealanders could face even higher mortgage and term deposit rates relative to the Official Cash Rate, with bank funding costs set to increase if conditions in global financial markets do not improve, the Reserve Bank says.

New Zealand banks currently did not need to access global markets, which they rely on for about a third of their funding.

However, if conditions had not improved by the time they needed to access funding, they could be facing higher costs to do so, the Reserve Band said in its September quarter Monetary Policy Statement.

Over the last three years, deposit and lending rates had increased relative to the OCR as banks sought more stable sources of funding, such as domestic deposits and longer-term wholesale funding, after the introduction of new core funding requirements.

Recent tightening in international funding markets highlighted the risk that the cost of longer-term funding might increase further, the Reserve Bank said.

“The indicative cost of international long-term funding has increased materially for New Zealand banks. Actual bank funding costs have so far been largely unaffected,” the Reserve Bank said.

“New Zealand banks are currently well funded and have not needed to issue term debt recently. Nonetheless, if conditions do not improve, bank funding costs will eventually increase,” it said.

“The central projection assumes that current funding cost pressures dissipate before New Zealand banks need to access these markets. Clearly there is a risk that this does not happen, which would cause deposit and lending rates to increase further relative to the OCR.”

'NZ banks highly liquid'

New Zealand and Australian banks were highly liquid, and had increased the maturity of their borrowings broadly in line with what the Reserve Bank wanted to see after implementing its Core Funding Ratio, Bollard told media at a press conference at the Reserve Bank.

“They’re in a much better position than they were back, say, in 2007. They’ve got plenty of liquidity,” Bollard said.

“But having said that, there isn’t a lot of demand for credit at the moment, and in addition, the medium-term markets for funding are not particularly healthy at the moment, and the banks generally aren’t going for those. They don’t need to at the moment,” he said.

“At some stage they will need to, and they’ll need to look at that again – that’s more a next year sort of story, not a this year story.”

Higher funding costs could hit both fixed and floating mortgage rates. It was not something the Reserve Bank was seeing at the moment, but was always a possibility in the future.

“Of course, we’ve got the normal range of monetary policy instruments to deal with that if we wish to,” Bollard said.

(Updates with Bollard quotes from MPS press conference).