A "deposit war" looked set to break out among New Zealand's retail banks as they competed for investors with money to place in term deposits, Craigs Investment Partners broker Chris Timms said yesterday.
The 90-day bank bill interest rate has been hovering around 3% for several weeks, rising to 3.05% on June 1, remaining at 3.03% for several days, falling to 3.10% for five days before spiking on Wednesday to 3.11%.
The 90-day bill rates used to be a key influence on floating mortgages but are now more aligned with wholesale funding by retail banks and closely follow moves in the official cash rate, which rose by 0.25% to 2.75% last week.
Mr Timms said the 90-day bills were still a factor for bank funding.
However, banks were having to offer interest rates substantially higher than the bill rates because of the need to source domestic funds as part of a Reserve Bank requirement.
Banks were now required to source a high percentage of their lending from New Zealand depositors.
Investors could get between 3.6% and 4.5% for their money on a three-month term deposit, depending on the bank and the amount being invested.
"You have to ask yourself `why you would pay 4.5% when you can get wholesale funding for 3%?' As a business decision, you wouldn't, but to meet the new requirements from the Reserve Bank, you have to source some of the money domestically - you have to pay the higher rate.
This reflects the banks' needs for `sticky money'."
Some banks were already offering up to 5.1% for six-month term deposits, Mr Timms said.
Deposit rates would continue to increase as competition intensified for funds.
That would trigger a round of depositors playing banks off against each other to find the best rates.
"Banks haven't been that loyal or that nice in some cases, so you will see investors going for the best rates rather than staying loyal to a particular bank."
The rising deposit rates would have a flow-on effect to mortgage rates, he said.
Soon after the interview with Mr Timms ended, ASB sent out its updated rates, which showed it had increased both its variable (floating) home-lending and most savings account rates.
Changes were also announced to the six and 12-month fixed lending rates.
Spokeswoman Catherine McGrath said the decision to increase the variable lending rate by 0.25% had been made following the recent increase in the OCR but also took into consideration wider market factors.
"This is the first increase in the OCR since July 2007 and further increases are anticipated over the coming months."
The increases yesterday took into account both the offshore funding costs and the continuing pressure on retail deposit rates in New Zealand, she said.
With overall funding costs having increased, ASB made the decision to lift its home-lending and saving account rates by 0.25%.
The variable rate was now 6%.
"The market is now entering a new cycle and we need to ensure our products are priced appropriately based on our underlying costs."
With that in mind, ASB had increased several of its deposit rates to ensure its saving customers saw the benefit, Ms McGrath said.
ASB economist Jane Turner said deposit rates had been trending upwards as the markets anticipated further rises in the OCR.
