Bankers differ on interest rate fall

Press, 29 July 1989, Page 3

Bankers differ on interest rate fall

By

PATTRICK SMELLIE

in Wellington

The Budget was creating conditions which might allow mortgage interest rates to start falling in coming months, the incoming chairman of the Bankers* Association, Mr George Stoopin, said yesterday.

The outgoing chairman, Mr Jim Macaulay, was not so positive, however. As chief executive of the National Bank, Mr Macaulay was at the centre of attempts earlier this month to encourage interest rates to fall, only to have the effort quashed by Reserve Bank action which pushed interest rates up. Mr Macaulay predicted that the National Bank’s experience would make other banks wary of making a move to a lower interest rate structure. “It’s very difficult to be a leader,” he said. Mr Stoopin, the chief executive of Westpac, said other banks were more likely to be influenced by fundamental changes in New Zealand’s interest rate structure. The fall in wholesale interest rates over the last fortnight, along with announcements in last evening’s Budget, were good signs for interest rates charged to small borrowers falling. “I think a number of banks may well be looking at those things right now,” Mr Stoopin said. “What we have seen is movements of about half a per cent in wholesale rates, and I think that’s encouraging. “Realistically, it will take a little time to make sure it’s a steady trend. But if it is, then the likelihood is that it will impact on retail deposit rates,” said Mr Stoopin. Mr Macauley warned that banks would look also to the effect of this month’s GST rise, before committing themselves to lower retail rates. Money market analysts were enthusiastic about the Budget yesterday, saying it provided the formula for long-term wholesale interest rates to fall. The Reserve Bank has indicated it wants long

rates to fall before it will accommodate lower mortgage rates. Interest rates on the benchmark longterm Government stock yesterday fell to historical low-points of around 12.65 • per cent, with dealers expecting that level to be maintained or for rates to slip slowly lower. Before banks’ retail rates could fall, shortterm money market rates would also need to come lower, in sympathy with long-term rates. This was starting to happen yesterday, with 90-day commercial bill rates falling slightly to about 13.2 per cent. The money markets reacted positively yesterday morning to comments from the Governor of the Reserve Bank, Dr Don Brash, who endorsed the Budget’s aims of seven to 10 per cent mortgage interest rates by December, 1992. Speaking at a post-Bud-get breakfast meeting, Dr Brash said these targets were “entirely reasonable expectations.” The Reserve Bank did not target particular levels of interest rates, he said. “The Minister is making explicit the interest rate consequences of the inflation objective of zero to 2 per cent,” he said. The Bank expected inflation of 6 per cent by March 1990, 3 per cent a year later, and under 2 per cent in 1992. He said that the decision to stop repaying foreign debt this year and repay domestic debt instead was because of New Zealand’s high interest rates. “Borrowing in New Zealand dollars at 13 per cent against overseas interest rates of 9 per cent, when you expect inflation to be 2 per cent had a strange ring to it,” said Dr Brash.