Rates may need to go up - BNZ

By DAVID HARGREAVES - BusinessDay.co.nz | Friday, 18 July 2008

As the country waits to see if the Reserve Bank drops official interest rates next week, the BNZ is warning that lending rates charged by banks might actually need to go up because of the global credit crisis.

BNZ economist Craig Ebert said about 20 per cent to 25 per cent of funding for the New Zealand banking sector came from offshore. The overseas markets were "charging a pretty penny" for the money because of the credit crunch.

"The fact of the matter is, global money has become as expensive for NZ banks as it's been in many a year," Ebert said.

"...While all and sundry are looking forward to falling interest rates, we are worried that term retail rates might have to go up - and stay there for a good while to come."

Ebert said the increasing cost for the banks of raising money was an issue as important for businesses as it was for households.

"For these groups it means that retail interest rate relief will probably not be as forthcoming as seems to be expected - and certainly not one-for-one with the [Official Cash Rate] reductions financial markets currently anticipate," he said.

"This suggests we should all brace ourselves for a dose of disappointment."

Ebert said the RBNZ would need to reduce the OCR by more than it might like in order to allow banks to shave retail lending rates - but even then there were no guarantees.

"It might take a resolution of the global credit crunch, rather than an aggressive campaign of OCR reductions by the RBNZ to materially reduce the cost of raising money on these shores.

"...So as everyone is wondering whether or not the RBNZ will cut 25 basis points or not at next week's OCR review, we note that even a stream of rate cuts could well be just 'whistling in the wind' in relation to having any material effect on retail interest rates - which are, let's face it, what matter the most," Ebert said.