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Banks start to hike floating rates

By Jenny Ruth

Tuesday 9th December 2003

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 Jenny Ruth
The Reserve Bank may have stayed its hand last week, leaving its Official Cash Rate (OCR) unchanged at 5%, but wholesale interest rate markets have had other ideas and already lenders are responding by raising their floating mortgage rates.

Westpac led the way back on 11 November in what one observer calls a "risky" move.

With 90-day bank bills, from which the banks finance their floating rates, topping 5.4% back then, Westpac raised its floating rate from 7.1% to 7.25%. As a rule of thumb, banks try to keep their floating rates between 1.75 and 2 percentage points above the 90-day bank bill rate to preserve their profit margins.

All the other lenders sat on their hands until they knew the central bankís decision last week.

Even though the 90-day bank bills fell below 5.3% after the Reserve Bank failed to raise the OCR, giving the banks even more reason to do nothing, on Monday, Bank of New Zealand decided to lift its floating rate from 7.1% to 7.25%. ASB Bank confirmed this is the way things are heading on Tuesday by lifting its floating rate from 7.05% to 7.25%.

Head of retail banking Barbara Chapman says that even though the 90-day bank bill rate blipped down a bit after the central bankís decision, the trend towards rising interest rates is still evident.

The Reserve Bankís forecasts have the 90-day bank bills reaching 5.75% by mid-2004, implying that floating mortgage rates will be about 7.75% by then.

"There has been quite a significant change in the 90-day rate since August," Chapman says. Demonstrating that, ASB is now paying 0.55% more in interest on six-months fixed term deposits, she says.

"We do think the time is right, even though itís a big decision for us to do it."

BNZ chief economist Tony Alexander says his bank considered raising its floating rates three weeks ago but decided to hold off until it knew the Reserve Bankís decision. When BNZ set its floating rate at 7.1%, the 90-day bills were trading at about 5.1%.

Brendan OíDonovan, chief economist at Westpac, says that following the central bankís endorsement of wholesale market pricing back in October, the market had been pricing in further rate increases when his bank made its decision. "If the markets told itís got it right, it tends to want to push it further. With the forward pricing in the market, the targeted (profit) margin was getting squeezed."

Even though the Reserve Bank didnít move this month, its forecasts for next year still justify Westpacís move, OíDonovan says.

By Tuesday night, National Bank hadnít moved its floating rate from 7.05%, and wasnít commenting on what it might do, while ANZ Bank also hadnít moved from its 7.1% floating rate.

The other banks rejected suggestions they might have chosen to hold off raising their floating rates in order to attract the business of disgruntled National Bank customers following its takeover by ANZ.

Alexander says the BNZ has never tried to "take advantage of restructuring in the banking sector," while Chapman says National customers wanting to change to another bank will probably be looking for fixed-rate home loans.

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