RBNZ turns focus to wholesale rates

The Reserve Bank of New Zealand has hinted once again that it is ready to lower the official cash rate but wants to see easing in lending conditions and rates before it makes the move.
 
At the review of its official rates, the central bank made no change to its 2.50 per cent OCR. It, however, used the occasion to warn that its growth forecasts may be at risk because of the higher NZ dollar and higher wholesale interest rates.
 
The reference to wholesale interest rates is pretty significant, because the RBNZ is no longer saying there is scope for banks to push lending rates down. Rather it is now saying that wholesale rates have to move lower because that's one of the key factors preventing lending rates from trending lower.
 
"The forecast recovery is based on a further easing in financial conditions. If this easing does not occur, the forecast recovery could be put at risk. In these circumstances we would reassess policy settings," the RBNZ said.
 
As per latest data on local operations of registered banks, lending rates of banks have fallen about 15 basis points from end-April to June, caused entirely by the drop in funding rates, as banks' spread remained unchanged during that period.
 
The RBNZ may have noted that a larger fall in lending rates would have been possible if funding rates, which are a function of wholesale rates, had to fall more steeply.
 
Apart from the level of rates, the RBNZ may be also concerned about the slowing in the pace of growth in business loans.
 
Separate recent data show that lending to businesses continued to drop for the sixth consecutive month while loans to the agriculture and housing sector continued to rise, albeit at a slower pace.
 
From NZ$81.02 billion in loans to businesses in December 2008, the figure shrank to NZ$78.77 billion in June 2009.  Loans rose 3.4 per cent on an on-year basis, the lowest pace of growth since December 2003.