It has been an interesting few weeks in regards to interest rates. Firstly the Reserve Bank surprised many in mid-November by keeping the official cash rate on hold. With inflation being below target and other factors such as a slowing global economy most economists had predicted a cut. This came after they surprised many back in August by cutting 50 basis points rather than the 0.25% most people had expected.

Wholesale rates moved up a bit on the back of the decision as the markets had to an extent priced in the reduction which did not eventuate. They are now back up around levels which they were last at before the August OCR cut referenced above.

RBNZ New Bank Capital Rules

Then we had the news that the Reserve Bank has implemented a requirement which will mean that banks will need to raise an additional $20 billion in capital over the next seven years. Their own analysis suggests an increase to rates of circa 0.2% but it is worth noting that bank economists are predicting a larger jump with ANZ suggesting between 30 and 60 basis points and ASB double that at 40 basis points.

It is not as harsh as it was looking initially as the plans had been for the banks to meet the requirement within five years and this effectively means that banks will need to hold $12 for every $100 they lend which is up from the $8 they need to hold now.

This change has meant that we have now overtaken Norway with the highest bank capital requirements globally and this has been put in place to enable the banks to withstand a one in 200 year banking crisis.

Some banks have reacted by increasing their rates although we are noting that with discounts rates are currently still roughly where they were a couple of weeks back.

While there is a general opinion that the cash rate will be cut further over 2020 it is unlikely we will see mortgage rates continue to drop much further. Household deposits are a large, important part of funding and if these were to drop lower it is likely many depositors would start to look for higher returns elsewhere.

There is already a funding gap starting to grow at the moment between
household deposits and borrowing and banks are much more reliant on this as a funding source since the GFC because of changes that were put in place to restrict them from being too dependent on offshore funding.

This gap coupled with the additional capital requirements could make bank funding a bit tighter this year. ■