"Banks need to be able to work with their customers through good times and bad," governor says
New Zealand banks are “up for” the task of supporting customers through the pressure of much higher interest rates that are now coming through.
This was what Reserve Bank Governor Adrian Orr said before Parliament’s Finance & Expenditure Committee (FEC) for the RBNZ's annual review on Wednesday, when asked about banks’ high levels of profitability and how they were helping customers out.
Following the successive RBNZ hikes over the past year that brought the OCR, from 0.25% in October 2021 to 4.25% now to tame 7.2% annual inflation, fixed rate mortgage borrowers now see their interest rates spiking from about 2%-3% last year to somewhere around 6%-7% now, interest.co.nz reported.
Banks need to be well-capitalised as well as have sound funding and be highly liquid.
“Banks need to be able to work with their customers through good times and bad,” Orr said. “And they need to take a long-term view on their customer base because it is a lifetime of earnings they get off each customer. So, through the next period we are saying to them, ‘You need to be in touch with your customers.’ They want to be in touch with them. The NZBA [banking industry body] are out there publicly saying they want to be helping and working with the customers.
“What are the practical things they can do? Awareness helps. Second one is around interest only. The other one’s around deferrals. Other ones are around assistance in alternative forms of financing or activity, etc. All of the things that you would expect a bank relationship to provide. And so, the banks are well aware. They are telling us publicly they are up for it and so that’s a great position to be in.”
Orr noted that New Zealand has a near record-low unemployment rate of 3.3% and exceptionally high labour force participation rates, interest.co.nz reported.
Households have amassed savings, with average household incomes growing in line with inflation. Nominal wage rates have increased, as people moved jobs, worked longer hours, or gained promotions to further boost incomes.
In the year to September 2022, average hourly earnings growth for the private sector sat at 8.6%, compared to the 7.2% Consumer Price Index inflation in the same period.
“As interest rates rise, we expect spending to slow and unemployment levels to increase as more people join the workforce over the coming year,” Orr said. “Even with the expected slowdown in the period ahead, it is anticipated that the level of employment will remain high.”
The RBNZ chief also commented on two RBNZ initiatives launched in 2020 – the Large Scale Asset Purchase programme (LSAP), through which the central bank originally purchased $53 billion worth of government bonds, and the Funding for Lending programme (FLP), through which banks could borrow at the OCR level. FLP ended on Dec. 6, with about $19 billion loaned.
The LSAP was highly effective in addressing the liquidity crisis that emerged in early 2020 and in dragging down longer-term interest rates, Orr said.
The FLP also gave banks confidence that they could access a stable and secure funding source amidst heightened financial market uncertainty.
“Banks were able to continue their business of financial intermediation, avoiding a credit squeeze or worse,” Orr said. “This lending programme needed a period of commitment from the Reserve Bank in order to provide banks the confidence to include the use of the facility in their forward plans. In hindsight, it could have been designed with more flexibility.”
Orr reaffirmed that the interest rate charged for accessing FLP funding increased in line with the OCR, “and the volume accessed accounted for only about 2% of bank funding.”
“Our experience with both these tools has built our capability to respond to unexpected events in future,” he said.
When asked about staff turnover, Orr said the turnover rate for RBNZ was 21.7% as of June 30.
“This aligns with the overall public sector rate of 21.7% for the same period, but includes the necessary bank-wide reorganisation,” Orr said. “Similar to other organisations we are experiencing higher than normal levels of staff turnover, in part promoted by the ongoing impact of COVID-19. We are however seeing strong demand in the marketplace for our roles and a high calibre of candidates coming on board.”
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