Finally a cut against the rising tide

The move raises the prospect of a renewed bout of competition over five-year rates, in particular, although Ian Park head of retail banking at ASB said that swap rates, which determine fixed borrowing costs, had tightened since the bank’s review.

Rates had been volatile recently: “In the last few days, the margins have got tighter across the curve.”

The Reserve Bank pegged the Official Cash Rate at 7.25% again last week with its Governor Alan Bollard making it clear the OCR could still rise this year.

Despite the hardening outlook for official rates, Park said that the bank had seen an opportunity to offer five year loans at lower costs.

“The yield curve was such that we could afford to bring that five year rate down.”

Park said there had been strong demand from borrowers for five year fixed rates.

“We were competitive before but we play our own game. We look at the cost of funds and what customers are asking for and we respond.”

ASB has reduced its five-year rate from 7.95% to 7.85% while its Bank Direct subsidiary cut its rate over the term to 7.80%. Sovereign, also part of the ASB stable, has dropped its two, three and five year rates.

Park said that some customers were splitting their loans between five year terms and shorter-term fixes.

The tightening in rates that he noted may dissuade competitors from following ASB down. BNZ trimmed its “Unbeatable” two-year rate to 7.89% earlier this month but other banks have not followed.

Competitors and brokers believe that the margins on loans at this level are unsustainable.

“The rate is heavily discounted and gives good insulation against anything the Reserve Bank may have to do this year to place extra downward pressure on inflation over 2008,” BNZ economist Tony Alexander says.