Why was Westpac slow in passing on OCR cut?

Westpac gave an apparently contradictory answer as to why it was so slow to pass on the Reserve Bank’s interest rate cut last month to parliament’s finance and expenditure committee’s banking inquiry.

RBNZ cut its official cash rate (OCR) by 50 basis points to 3.75% on Feb 19 and Green Party leader Chloe Swarbrick asked Westpac chief executive Catherine McGrath why Westpac was the second to last bank to pass that OCR cut on to customers.

“I think everyone did it (cut mortgage rates) within several hours,” McGrath said.

“One of the things we look at is competition and are we all doing price matching. One of the things that we did was that we passed on 60 basis points to business loans, we passed on 40 basis points to variable home loans,” she said.

“One of the reasons we did that was, firstly, we had that great 4.99% for three years deal (home loan) out in the market for a couple of weeks beforehand, and two, most New Zealanders aren’t actually on variable home loans.”

Usually only about 10% of home lending is at variable rates but it’s currently higher than that because people are expecting lower rates are coming, she said.

Westpac is keen to grow its business lending, McGrath said.

Westpac’s three-year fixed mortgage rate currently is 5.39% but it is offering a two-year rate of 4.99% which is matched by other banks including ASB, ANZ, BNZ and TSB.

Swarbrick asked by it had taken Westpac 20 days to pass on the OCR cut when it took other banks nine or 14 days.

“We do have to notify our customers when interest rates are changing,” McGrath said.

“When rate wen up, it took us about …. we gave about 18 days’ notice for existing customers. As rates are coming down, that’s a shorter period of time as we’ve started to build efficiency into the system and we will continue to do that,” she said.

“One of the criteria I particularly look at for lending is are we effectively faster on the way down than we are on the way up because that feels like the right thing to do from a customer perspective and we definitely are.”

McGrath told the committee that Westpac’s strategy isn’t to match what competitors are doing in the market, particularly with cash-back offers, although her bank does monitor that.

“The deal that is offered on any particular week or on any particular special is based on a number of factors at the time,” she said.

“So, if I look at when we put the 4.99% three-year fixed rate into the market, it was better than all other banks by quite some stretch. I can’t recall, we may not have had a cashback deal at the same time because the margin on that would have been quite narrow,” she said.

“So, we look at the profitability of the product overall. We will be quite tactical in terms of the market opportunities we see.”