MPs slam banks over interest rates

In a bipartisan move, a Parliamentary Select Committee has urged banks to pass on cuts to the official cash rate to their floating and short-term mortgage rates.

Tuesday, June 9th 2009, 9:24PM

by Paul McBeth

The Finance and Expenditure Committee report raised concerns about the banking sector's response to the recession, finding the Reserve Bank's series of cuts to the OCR had not been passed on in their entirety by New Zealand's banks, while banks' profit margins had declined marginally in the past year, due mainly to provisioning against future credit losses.

The banks' refusal to pass on cuts to the OCR might be undermining the central bank's efforts to tighten monetary policy, the report said.

"The report reflects strong and growing concerns across Parliament that banks have no t fully passed on interest rate cuts and may not be appropriately sharing the burden of the recession," said Labour Party finance spokesman David Cunliffe in a statement. "Today's report is a strong bipartisan statement of concern that the banking sector would do well to heed."

The Reserve Bank has discussed interest rates and profit margins with the banks, and the committee hopes the sector will work more closely to provide credit at reasonable terms that reflect monetary policy.

The committee also advised the central bank to "maintain a prudent approach" when providing banks with loans through its term auction facility. The Reserve Bank has advanced $7.6 billion to the banking sector and estimates an additional $18 million is available if required.

The central bank told the committee that it is monitoring the housing market, with houses now overvalued by 10%, compared to 20% at the top of the last boom. The bank believes home-buyers are acting more rationally now than two years ago, but notes the ratio of house prices to disposable income is still above the long-term average.

Central bank Governor Alan Bollard will review the OCR on Thursday, and economists are divided over whether he will hold rates at 2.5% or cut them a further 25 basis points.

Read Full Report here

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