Depositors expected to benefit from end to funding for lending programme

Depositors expected to benefit from end to funding for lending programme
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Depositors are expected to benefit as another source of cheap money comes to an end.

With interest rates on the rise, CoreLogic chief economist Kelvin Davidson said the property market was likely to continue its downward spiral for another year as banks were likely to pass higher interest costs on to borrowers.

While the market was not surprised to see a 75-basis-point rise in the Reserve Bank's official cash rate (OCR) to 4.25 percent, the forecast rise to 5.5 percent by the middle of next year was a shock.

While rising interest rates hurt borrowers, depositors were in line to benefit from higher rates, particularly as the central bank's funding for lending programme ends next week.

The programme had allowed eligible banks to borrow directly from the central bank at the same rate of the OCR for the past two years.

"With the funding for lending programme due to come to an end, banks may need to increase their margin and/or find other funding to cover for the reduction in that cheap source of liquidity. That plays into the hands of term depositors," Davidson said.

Banks would need to pay more interest on deposits and wholesale funds, which would in turn be passed on to mortgaged homeowners and other borrowers.

"Higher mortgage rates will obviously limit the pool of potential new borrowers/house buyers, but also mean a big adjustment for existing borrowers rolling off previously lower fixed rates," Davidson said.

CoreLogic estimated about 20 percent of existing home loans were fixed but due to reprice in the next six months, with a further 10 percent in the following three months and 26 percent within six to 12 months.

Davidson said the higher interest rates would put further downward pressure on house values, which were likely to fall 20 percent by the end of next year.

While increased mortgage lending rates were inevitable, Davidson said the Reserve Bank might not need to go as far as indicated with the OCR.

"To be fair, there may be an element of 'tough talk' in the latest MPS - i.e. basically the RBNZ trying to 'scare' inflation down without actually having to push the OCR all the way to 5.5 percent or tip the economy into recession."