Floating interest rates remain higher than the Reserve Bank believes can be warranted but, in general, trading banks were passing on to lenders the benefits from cuts to the official cash rate.
In a report on bank funding costs and margins released yesterday, the Reserve Bank said higher funding costs had tempered banks' ability to lower interest rates, with between 100 and 150 basis points of official cash rate cuts (OCR) offset by higher marginal funding costs for deposit and wholesale funding.
This had forced the spread between marginal funding costs and floating mortgage rates to widen in recent months, to historically high levels, while the spread on fixed-rate mortgages had also increased from historically low levels to a point that was more typical.
"On balance, we believe the pricing of the banks' fixed-rate lending products is reasonable given the underlying cost of funds and taking into account the margins typically earned on these products over time.
"However, the pricing of floating-rate mortgages appears unusually high over recent months, and we believe there is some scope for further reductions in these rates without compromising the viability of this lending."
The report should remove some of the tension which had led to complaints by mortgage and business lenders about high interest rates as well asleading to consideration by Parliament's finance and select committee of holding an inquiry, a move which was late last week blocked by a majority of the committee.
The Reserve Bank said since the financial crisis the cost of deposits had increased, with marginal funding costs lifting from between 20 and 30 basis points over the OCR before the crisis, to the current 100 and 150 basis points.
Banks have been maintaining or growing that funding source, but were having to compete for retail investors with corporate bond issues.
A consequence of that was six-month deposit rates that were priced at 40 basis points below six-month bank bill rates prior to 2008 were now more than 100 basis points higher.
The report said short-term wholesale funding costs rose sharply after the Lehman Brothers collapse, but had narrowed as central banks increased liquidity and risk appetite improved.
Those rates were still above pre-crisis levels.
Long-term wholesale funding costs have eased from the heights reached in late 2008, but were still above those that prevailed prior to the financial crisis.
The report said long-term wholesale funding costs were linked to movements in Australian bank bond spreads, with a margin added to reflect the high costs for New Zealand bank issuers.
