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Banks cut fixed term home loan rates

BANKS have reduced fixed-term mortgage rates, undermining efforts by the Reserve Bank to keep a lid on inflation by holding up rates.

State-owned Kiwibank became the lowest in the market when it cut its two-year fixed rate to 7.35 percent from 7.5 percent soon after Reserve Bank governor Alan Bollard left the official cash rate unchanged.

Chief executive Sam Knowles said there was room to cut two-year rates because of economic conditions, "including the decision by the Reserve Bank to hold the official cash rate.

National Bank also reduced its two-year rate, from 7.8 per cent to 7.65 per cent, and its three-year rate to 7.6 per cent. Those rates were matched by ASB Bank.

Long-term fixed rates are being lowered because international interest rates have fallen unexpectedly.

The two-year fixed rate - the most popular home-loan term - compares with floating mortgage rates of 9 percent, which are directly influenced by the official cash rate.

Bank of New Zealand is the lowest of the big banks, with two-and three-year rates of 7.55 percent and bank economists said that rate could be trimmed a further 0.10 percent if competition intensified. However, the mortgage rate cuts are not expected to fuel another rise in house prices, as happened late last year when a mortgage price war encouraged a flood of lending.

The Reserve 'Bank is forecasting house prices to flatten by the end of the year.

In April, a surge in house - prices ran out of puff, leading to a 3 per cent fall in the median price.

Dr Bollard warned that official rates could still rise, because inflation is stubbornly close to 3 per cent - the top of his target band.

"Certainly, there is no scope for an easing in policy in the foreseeable future," he said.

This tough line is expected to keep the Kiwi dollar about US70 cents for the rest of the year, keeping the heat on struggling export manufacturers, forestry and fishing companies, and tourism.

BNZ chief economist Tony Alexander said house prices were levelling out because of slowing population growth as migration fell, a rising housing supply, first home buyers finding houses unaffordable and investors growing cautious.