19 Oct 2022

Cost-of-living crisis: Robertson says govt to support low and middle income earners, banks not making excessive profits

11:14 am on 19 October 2022
Grant Robertson

Finance Minister Grant Robertson says the government is ready to help those struggling. Photo: RNZ / Samuel Rillstone

Finance Minister Grant Robertson says there is no evidence suggesting banks are making unreasonable profits as inflation and the cost-of-living crisis impact on New Zealand families.

Robertson told Morning Report hikes in bank loans, including mortgage rate loans, were set off what the Reserve Bank did and that banks' profits were not excessive.

The Reserve Bank has been bumping up the official cash rate (OCR) in its attempts to tackle high inflation. The OCR now stands at 3.5 percent.

The September quarter shows annual inflation stubbornly stands at 7.2 percent, marginally lower than the 7.3 percent rate of the previous quarter, but well above the predicted figure of around 6.6 percent.

Consumer prices increased 2.2 percent in the September quarter, driven by higher food and housing costs.

Some experts expect the Reserve Bank to more aggressively hike the official cash rate by 75 basis points next month to 4.25, with further hikes to come next year taking the rate to a possible 5 percent.

Robertson said New Zealand was in a stronger position than most other countries to deal with an economic downturn, with unemployment and debt levels low.

He suggested the rise in bank loan interest rates was a necessary consequence of monetary policy, but that the government was prepared to mitigate financial hardships faced by people.

"The Reserve Bank has a job to bring inflation back down again and the tool they use for that is the official cash [rate]," he said.

"What the government can continue to do is support people on low and middle incomes, as we have with various initiatives that we've put in place over the course of the last year or so.

"But what the government also has to do is make sure that we're focused and targeted in our spending and do our bit. But this is a global phenomenon - right around the world people are facing this."

He said significant increases in mortgage repayments now faced by homeowners across the country, interest rates on loans increase, did not suggest banks were attempting to extract unreasonable profit margins on the back of Reserve Bank policy.

"We always ask our retail banks to make sure that they understand the environment they're operating in, that their customers are operating in," he said.

"They have to have a social licence to operate and I think any New Zealander would be concerned if they were drawing excessive profits beyond what they need to reasonable margin.

"Bank profits have been high in New Zealand for a long time and I think the important thing here is that there isn't any evidence that there's a particular set of behaviour right now that's trying to overly capitalize on this.

"But they do have significant profits and we would expect them to bear that in mind and bear in mind the situation of the consumers."

The retail bank sector reported a $1.7 billion collective profit for the three months ended June, just below the record set in the previous quarter and defying the pressures of a slowing economy, rising interest rates and inflation.

Robertson also admitted that those already struggling on superannuation and welfare benefits were unlikely to get a 7.2 percent increase in payments to match inflation over the coming period.

"But people will be supported to get through this period, just as we have with additional payments, like the winter energy payment, like the cost-of-living payment," Robertson said.

"We still have the cuts to fuel excise duty and half-price public transport up to the end of January. So, we are still there supporting people through what is a tough time."

Loanmarket director Bruce Patten said about 40 percent of homeowners had mortgages with interest rates of between 2 and 4 percent were set to expire.

He told Morning Report Auckland homeowners would be hit hardest, particularly those who had bought at the height of the market.

The average mortgage of $650,000 in Auckland would see homeowners' yearly repayments increase by $26,000.

"I think the hardest thing will be the young ones, particularly that have bought in the last couple of years with their mortgages will be closer to the $900,000 mark," he said.

"The good thing about them, though, is their incomes. I'm not so worried about them, because their incomes will go up and we are starting to see an increase in incomes.

"It's probably your middle-aged people that have a mortgage that their incomes are probably at their peak pretty much. So, they're also going to have a bit of a tough time and really need to consolidate. It's a double whammy, because we've got the cost of living along with the mortgage increases all coming at the same time."

He hoped the Reserve Bank would only increase the OCR by half a percentage point in November, which he thought would be enough to meet its anti-inflationary targets.

BNZ head of research Stephen Toplis told Morning Report the economy would be in recession next year, but that there would be a modest correction, as opposed to an economic crisis.

He said inflationary pressures would ease and unemployment would reach a "sustainable" level of between 4.5 and 5 percent, and that businesses selling 'big ticket' items would feel the pinch.

Get the RNZ app

for ad-free news and current affairs