Only a small amount of the two percentage point cut in the official cash rate (OCR) since August last year has fed into weighted average mortgage rates so far, according to the Reserve Bank.
The effective weighted average mortgage rate across all borrowers peaked at 6.4% last year and has only come down to 6.2% currently, said Chris McDonald, RBNZ’s manager of financial system monitoring and analysis at a media conference to discuss RBNZ’s latest financial stability report.
The report says RBNZ expects about 60% of mortgage lending to reprice to lower rates within the next six months and about 80% within a year.
The current rates offered by banks for one-year and two-year fixed terms are about 5%.
More borrowers coming off fixed terms have opted to remain on floating rates or very short term fixed periods because they expect further cuts in the OCR.
Acting governor Christian Hawkesby said that the lag in the transmission of OCR cuts to the economy is one of the reasons why even though the economy is relatively subdued currently, RBNZ expects activity to pick up going forward.
RBNZ is widely expected to cut the OCR to 3.25% later this month from 3.5% currently and 5.5% ahead of the first cut of this cycle last August.
RBNZ also noted that although house prices are down about 13% from their peak in November 2021, they have been largely unchanged over the past year
House prices remain near the top of RBNZ’s range of sustainable house price estimates.
Hawkesby said the housing market still looks “stretched” even though prices have come back.
This isn’t a large issue from a financial stability perspective and house prices are likely to be subdued going forward, he said.
RBNZ released the terms of reference for its review of bank capital requirements which was announced immediately after former governor Adrian Orr left abruptly in early March.
Finance minister Nicola Willis has said she had asked for advice on current bank capital settings and, in particular, that they were designed to protect the country from a one-in-200 year bank collapse when a more normal target is a one-in-100 year event.
A one-in-100 year event wouldn’t have required any increase in bank capital from pre-December 2019 levels but the 200 year target meant bank minimum capital requirements nearly doubled.
One estimate puts the cost of over-regulation of banks to the economy, including the onerous new capital requirements, which are being phased in through to June 30, 2028, at between $10.1 billion and $14.4 billion a year.
Hawkesby said RBNZ is “very open-minded” going into the review and hasn’t committed to any particular outcome.
National Australia Bank, which owns Bank of New Zealand, published details of its capital, including both the Australian Prudential Regulation Authority (APRA) and the RBNZ requirements, compared with international rules.
At March 31, its 12% common equity ratio was 12% under APRA and RBNZ rules but that is comparable to 17.6% under international rules. The RBNZ rules added half a percentage point of the latter amount
Similarly NAB’s total capital ratio of 21% at March 31 would be 29.6% under international rules.
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