Reserve Bank Rate Shift: What It Means for Your Mortgage and the Economy
The Reserve Bank plans to reduce the amount of capital banks are required to hold against their loans.
Photo: RNZ / Dom Thomas
New Zealand homeowners and businesses could see a slight easing in borrowing costs following the Reserve Bank’s (RBNZ) recent decision to reduce capital requirements for banks. While economists predict the impact will be modest, the move signals a shift in the RBNZ’s approach and reflects evolving economic conditions.
Why the Change in Capital Requirements?
Since 2019, the RBNZ has been steadily increasing the amount of capital banks needed to hold against their loans. This was a precautionary measure, designed to ensure banks could withstand a significant economic shock – think a major recession or a housing market crash. The goal was financial stability. However, these higher requirements also increased the cost of lending.
The RBNZ now believes the initial increases have largely achieved their purpose. Furthermore, concerns were raised that the rules disproportionately impacted smaller banks, hindering competition, and potentially making credit less accessible. The reduction of approximately $5 billion in required capital aims to address these issues.
The changes aren’t just about the overall amount of capital. They also involve more refined risk assessments – meaning banks will be able to more accurately reflect the risk associated with different types of loans. This “granular risk weighting” is a key component of the overhaul, alongside aligning capital instrument rules more closely with those in Australia.
How Will This Affect Mortgage Rates?
The big question for homeowners is: will this translate into lower mortgage rates? The consensus is… probably a little. Infometrics chief forecaster Gareth Kiernan estimates a potential reduction of 40-60 basis points (0.4-0.6%). Squirrel CEO David Cunningham suggests the impact might be limited to preventing *further* rate increases, as banks have already factored in significant capital costs.
It’s important to remember that mortgage rates are influenced by a multitude of factors, including the Official Cash Rate (OCR), wholesale funding costs, and bank profitability. The RBNZ’s move is just one piece of the puzzle. Recent attempts by Governor Anna Breman to signal a pause in future OCR hikes haven’t fully convinced the market, with swap rates – which heavily influence fixed mortgage rates – remaining elevated. This disconnect highlights the market’s belief that economic recovery will necessitate further tightening of monetary policy.
Did you know? Basis points are used to describe changes in interest rates. One basis point equals 0.01%.
Beyond Home Loans: Impact on Business Lending
The changes aren’t solely focused on residential mortgages. Economists believe business and farm lending may see a slightly more noticeable impact than home loans. The initial capital increases in 2019 had a greater effect on these sectors, so unwinding those requirements could provide some relief to businesses seeking funding.
The Bigger Picture: RBNZ Credibility and Market Expectations
The RBNZ’s actions are being closely watched, not just for their direct impact on borrowing costs, but also for what they say about the central bank’s credibility. Shamubeel Eaqub of Simplicity points out the challenge the RBNZ faces in simultaneously forecasting rising interest rates and attempting to convince the market that rates won’t rise as much as predicted. This perceived inconsistency can undermine the RBNZ’s influence.
The market’s expectation of a future economic recovery is a key driver of current swap rates. Investors are pricing in the likelihood of future OCR increases to combat potential inflation as the economy strengthens. This suggests the RBNZ may be walking a tightrope, balancing the need to support economic growth with the need to maintain price stability.
Future Trends to Watch
Several key trends will shape the future of bank capital requirements and lending rates in New Zealand:
- Economic Growth: A stronger-than-expected economic recovery could lead to renewed pressure on the RBNZ to raise interest rates, offsetting any benefits from the capital requirement changes.
- Global Economic Conditions: Global economic slowdowns or financial instability could prompt the RBNZ to reassess its capital requirements and potentially increase them again.
- Regulatory Changes: Ongoing reviews of banking regulations, both domestically and internationally, could lead to further adjustments in capital requirements.
- Competition in the Banking Sector: Increased competition among banks could lead to more competitive lending rates, regardless of capital requirements.
Pro Tip: Regularly review your mortgage and other loan options to ensure you’re getting the best possible rate. Consider using a mortgage broker to compare offers from different lenders.
FAQ
Q: Will my mortgage rate definitely go down?
A: Not necessarily. The impact is expected to be small, and other factors will also influence rates.
Q: What are basis points?
A: Basis points are a unit of measurement used to describe changes in interest rates. 100 basis points equals 1%.
Q: Why did the Reserve Bank increase capital requirements in the first place?
A: To ensure banks were resilient enough to withstand a major economic shock.
Q: What is granular risk weighting?
A: It means banks can more accurately assess the risk associated with different types of loans, leading to more efficient capital allocation.
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