RBA Sees Policy Limits Play Out 1,000 Miles East

General Images Of Economy As NZ Diaspora Returns

Auckland, New Zealand.

Photographer: Brendon O'Hagan/Bloomberg
  • New Zealand's major banks yet to pass on March easing in full
  • Rising costs will spur Australian banks to lift rates: QIC

A cut in Australia’s benchmark interest rate would give little respite to homeowners and businesses that have already seen borrowing costs begin to rise, if this month’s policy easing in neighboring New Zealand is anything to go by.

Australia’s four biggest banks, which raised mortgage rates in 2015 and increased costs for businesses in February, also own the largest lenders in New Zealand. So far none of them has passed on to household borrowers in New Zealand the full 25 basis points of surprise stimulus delivered by the Wellington-based Reserve Bank on March 10.

The Reserve Bank of Australia has left the door open for further easing as it supports investment and consumer spending in an economy weighed down by the end of a resources boom. Yet the nation’s lenders face higher bond market costs and aren’t feeling generous after raising a record A$20 billion ($15 billion) in equity last year to meet stricter capital requirements. They will increase interest rates and might not pass on any potential RBA cuts in full, according to Brisbane-based fund manager QIC Ltd.

“We have a view the banks will increase rates independent of the RBA before June as costs rise,” said Katrina King, director of research and strategy at QIC. “That will make the RBA’s work much heavier.”

RBA Cuts

QIC expects the RBA to cut its benchmark rate in the second half of the year, she said. Traders were pricing in an 80 percent probability that the central bank will reduce its cash rate to 1.75 percent from an already record low 2 percent within the next 12 months, according to swaps data compiled by Bloomberg as of 1 p.m. on Wednesday in Sydney.

Policy makers at their March 1 meeting judged that it was appropriate to leave the cash rate unchanged at an accommodative setting as the economy rebalances away from mining-led investment, the RBA said in minutes released on Tuesday. They reiterated that continued low inflation would provide scope to ease monetary policy further, if needed.

The RBA also noted that markets had been volatile following the Bank of Japan’s January decision to implement negative interest rates and “there appeared to be more uncertainty about the direction and potency of monetary policy in the major jurisdictions.”

Australia & New Zealand Banking Group Ltd., Commonwealth Bank of Australia, National Australia Bank Ltd. and Westpac Banking Corp. collectively account for 77 percent of outstanding loans in Australia, according to regulatory data, while their subsidiaries control more than 80 percent of the New Zealand market.

Margin Pressure

In the days following the RBNZ rate cut, the New Zealand units of ANZ and Westpac dropped their variable home loan rates by 10 basis points, while Commonwealth Bank’s ASB Bank Ltd. reduced theirs by 20 basis points, according to statements from the lenders. Bank of New Zealand, owned by National Australia Bank, hasn’t moved as yet, according to an e-mailed statement.

Their reaction was a repeat of what happened in Australia in May, when the banks passed on only a part of the central bank’s cut for the first time since 2012. Three of them went on to increase costs for landlords in July and all four followed with a variable mortgage rate increase in October. They also raised business lending rates last month, citing increased regulatory and funding costs.

The average yield premium over the swap rate on financial company bonds in Australia climbed to 114 basis points this month, a level unseen since July 2013, based on the Bloomberg AusBond Credit Financials Index.

Lending Profitability

Australia’s four largest lenders saw their net interest margins, a key measure of lending profitability, fall to the least in at least 8 years in 2015 amid increased competition and rising funding costs, according to data compiled by Bloomberg. Rate increases by the banks helped them arrest the decline toward the end of last year.

Spokesmen at the four banks declined to speculate on interest rate movements.

“If there is another RBA cut, I don’t see the banks matching it in full as their costs are already elevated,” said T.S. Lim, a Sydney-based analyst at Bell Potter Securities Ltd. “They have managed to stabilize margins by increasing rates and they have very little room to risk it.”

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