Higher interest rates are playing out as the Reserve Bank had hoped and expected, the bank’s governor Adrian Orr has told MPs.
The bank reported on Wednesday that it expected up to 4% of mortgage holders to fall into negative equity as average effective interest rates ticked up to 6.1% by the end of the year and house prices slipped further.
It also acknowledged that a small but growing number of people were falling behind on their mortgage payments.
National Party finance spokesperson Nicola Willis questioned the bank on whether the country could be in for a “really dark winter” if the jobs market also deteriorated in the next few months, as many economists forecast.
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But Orr said the current scenario was what the bank would expect to see, given the way that monetary policy tightened spending behaviour.
“What we’re seeing is what we are hoping to observe, which is less spending to better match the supply capacity, inflation pressures easing, and the economy working its way through the current environment.”
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Reserve Bank governor Adrian Orr.
The impacts were “business as usual” for monetary policy, but coming against the backdrop of a very resilient financial system and remarkably low unemployment, he said.
As well as highlighting the plight of people who had borrowed big at the height of the housing market boom in and around 2021, the Reserve Bank’s financial stability report also shone more light on the high profitability of New Zealand’s large Australian-owned banks.
It found ANZ, ASB, BNZ and Westpac enjoyed a 15.3% return on capital between 2018 and 2022, which was a significantly higher return than banks enjoyed in any of the nine other countries it studied, bar Canada.
BNZ announced shortly after the select committee meeting ended that its net profit increased by 13.5%, or $96m, to reach $805 million in the six months to the end of March.
Chief executive Dan Huggins said it would waive $22m in interest costs for customers impacted by the recent cyclones and had donated more than $360,000 to KidsCan, The Foodbank Project and TaskForce Kiwi.
Reserve Bank deputy governor Christian Hawkesby told the select committee some of the factors that had driven bank profits higher were to do the with the economy and were temporary, but they also benefitted from being able to leverage off the low cost bases of their Australian parents.
Orr indicated it was an open question whether those lower costs were “playing back into better outcomes for consumers”.
But he appeared to suggest that if bank profits were too high, that lay outside the realm of the Reserve Bank and that the solution lay in technological innovation and competition policy.
“Open banking and the potential for digital currencies; these are the ‘big game changers’ for financial intermediation, because they enable customers to move much quicker without the fixed investment and hassle of shopping around for financial services,” he said.
