RBNZ "disappointed" banks fail to pass on OCR cuts

New Zealand Economic Update
RBNZ Financial Stability Report

The RBNZ released its six-monthly Financial Stability Report today which said that, unlike many other developed countries, New Zealand had not experienced significant distress in its banking sector, nor had credit availability tightened to the same extent as elsewhere. RBNZ Deputy Governor Grant Spencer did, however, urge domestic banks to make adequate provisions and maintain capital levels to absorb further unexpected losses, saying that, despite domestic banks’ asset equality remaining strong, impaired assets have still risen over the past year.

With respect to monetary policy, the Deputy Governor highlighted the RBNZ’s disappointment that some domestic banks had refrained from passing on cuts to the OCR by reducing mortgage rates. Only two of the major banks have dropped their rates following the 50bp cut to the OCR delivered on April 30, even though the RBNZ at the time made clear that the OCR would be kept “at or below the current level through until the latter part of 2010.” Mr. Spencer said, though, that other factors were affecting the relationship between the OCR and retail rates, referring to the higher funding costs currently being faced by commercial banks.

With modest shifts to the OCR not ruled out in coming quarters and Mr. Spencer reaffirming that there is still “potential scope for monetary policy leverage,” we maintain our forecast for a 25bp OCR cut in June. We do, though, acknowledge the risk that the RBNZ may sit on the sidelines. One reason to stand pat next month could be a desire to preserve monetary policy power for use when unemployment soars; this means there is a case to be made for the RBNZ to wait until 2H09 before delivering further policy support. Further, RBNZ Governor Alan Bollard has oft reiterated a desire to maintain the attractiveness of investment in New Zealand by foreign investors; this also will remain a key policy consideration.

ENDS

© Scoop Media