Flipside of interest rate cuts

Recent cuts in fixed interest rates highlight the level of intense competition in the New Zealand banking sector. This is good news for borrowers, but will impact on returns for bank depositors.

Interest rates are at historically low levels. This is due to a drop in wholesale interest rates as a result of ongoing uncertainty in the global economy, driven largely by volatility in Europe. “Consumers are getting the benefit of this window of opportunity,” said New Zealand Bankers’ Association chief executive Kirk Hope.

“On the flipside it’s important to remember that cuts in lending rates also mean a decrease in savings interest rates. This will affect depositors who rely on the interest returns their investments earn. At a national level, this could impact on our private savings which have increased through the economic recovery.

“Balancing the needs and aspirations of borrowers and depositors, within the context of global uncertainty and a very competitive market, provides plenty of challenges for our banks. Domestic deposits are needed to ensure ongoing lending, which is vital for economic growth.

“Added to those challenges are increased regulatory demands such as the Reserve Bank’s core funding ratio and higher Basel III capital standards which make bank profitability even more important,” said Hope.

In its May 2012 Financial Stability Report, the Reserve Bank of New Zealand noted the banks were performing well, and that competition was set to increase as banks respond to lower credit demand. This will likely result in downward pressure on bank net interest margins, which are already lower than pre-global financial crisis levels.

“Banks need to retain an interest margin to continue operating and investing in New Zealand. They are major businesses which make a huge direct contribution to our economy,” said Hope.

In 2011 the New Zealand banking industry’s operating expenses totalled over $4 billion. This includes paying New Zealand businesses for goods and services, sponsorships, contributions to community and voluntary programmes, and financial literacy initiatives. It also includes salaries paid to over 25,000 people who are employed by banks in New Zealand.