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RBNZ sees slower credit growth as lenders compete for local funding

Friday 12th May 2017

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The Reserve Bank expects credit growth to slow as banks fight more aggressively for deposits to fund their expanding loan books. 



Central bank figures show annual home loans grew at an annual pace of 8.7 percent in March, slowing from a pace 9.1 percent in December, while business lending growth slowed by 0.4 of a percentage point to 7.1 percent and the pace of agri lending growth shrank to 2.7 percent from 3.9 percent. 



Banks have been complaining about the rising cost of funding in recent months, saying they've needed to go overseas to access more expensive credit lines and boost deposit rates to maintain their lending growth, which has squeezed profit margins. 



Deputy governor Geoff Bascand says the RBNZ anticipates lending growth will slow down to match deposit growth, which was up an annual 7 percent in March, but doesn't expect it will halt lending to households altogether. 



"We expect credit growth to slow down a little bit towards the deposit growth, and they're trying to push deposit growth up through deposit rates," Bascand told BusinessDesk in an interview after yesterday's policy announcement. "How much that pushes total deposits as opposed to a bit of competition amongst the banks just shifting it around, we're yet to see." 



The last time lenders fought aggressively for customer deposits was in the wake of the global financial crisis and collapse of New Zealand's finance companies, which coincided with the Reserve Bank setting a minimum level of funding for banks to source locally. RBNZ figures show the weighted average rate on a six-month deposit was 3.32 percent in April, up 3.17 percent a year earlier. 



Bascand said the Reserve Bank is watching the growing use of wholesale funding lines, and while the banks have internal limits and are less reliant on short-term lines, or 'hot money', than they used to be, the central bank wants to know what vulnerability comes from that. 



The drive for customer deposits comes as New Zealand's household saving rate is in negative territory, with the Reserve Bank projecting it was at -2.9 percent of disposable income in the 2017 March year when the slump in dairy prices weighed on farming families' incomes. 



"Debt levels are high and have been rising again after a period of moderation. We think still that households will be a bit constrained and cautious about going too far," Bascand said. "Households are certainly getting the message, we hope, that there's a prospect interest rates could move and if you've got a lot of debt and rates move up, debt servicing wouldn't be very comfortable." 



The Reserve Bank surprised some economists yesterday when it held its projected track for the official cash rate through the forecast horizon, looking through what it deemed to be one-off boosts to headline inflation. 



ANZ Bank New Zealand chief economist Cameron Bagrie noted tightening credit conditions in the property market and the prospect of more prudential tightening in the RBNZ's capital adequacy review may have influenced the central bank's views. 



"This will not explicitly be in the forecasts, but must implicitly shape the Reserve Bank’s thinking in some way, as it will have a bearing on monetary policy over time," Bagrie said. 



RBNZ deputy governor Grant Spencer told Parliament's finance and expenditure select committee that higher capital requirements could increase the cost of credit at the margins, and may be weighing in part on the banks, but that the bigger factor was a liquidity issue due to the slowdown in deposit growth. 



"The gap between the deposit growth and credit growth has increased, and I think that's the main factor contributing to the caution," Spencer said. 





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