Banks won’t pass on cash rate cuts in full, predicts economist

by NZ Adviser10 Aug 2016
With expectations the Reserve Bank will lower the official cash rate (OCR) tomorrow, Prime Minister Key urged banks to give customers the benefit of the cut and pass any rate reductions in full. 

But ANZ's chief economist Cameron Bagrie has said that won’t happen, Fairfax Media reports. 

Key said any interest rate cuts by the banks following a cash rate cut were unlikely to have a significant impact on the housing market, because of already record low interest rates. 

"As good corporate citizens, if their cost base is reducing, then we would expect them to pass that onto consumers," said Key.

"It's for the government and the Reserve Bank to consider how it deals with the wider issues, but what we wouldn't want to see is a reduction in the costs to the banks and an increase in profits for the banks without any flow-on effect for consumers."

ANZ’s Bagrie said he doesn’t expect banks to pass on any cash rate cuts in full as they don’t want to lose depositors.

"Funding costs are up. If you look at where we are raising money today versus where we were last year, credit growth is outstripping deposit growth, which is just unsustainable. 

“You've got to have money coming in the door before you can put it out the door." 

"We've got to see less credit and more deposits. Unfortunately pricing signals are incentivising the reverse."
Bagrie said it is likely New Zealand will have a similar experience to what recently happened in Australia, when barely half of the OCR was passed on to borrowers.

On whether he expects banks to see more pressure on lowering borrowing rates, Bagrie said those reactions are ignoring the fundamentals of bank balance sheets.

"You're going to see a reaction where people naturally take the borrowers side of the equation, without realising there is a completely other side to bank balance sheets which is the liabilities and the deposits."

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