InvestNow News – 29th May – Harbour – Negative rates – An option for the RBNZ, but not its preference

Hamish Pepper – May 25, 2020

Key Points

  • The RBNZ continues to entertain the idea of a negative Official Cash Rate (OCR) to provide additional economic stimulus
  • There is global precedent, but the associated lower policy efficacy and financial stability risks cause much debate
  • A negative OCR cannot be ruled out and keeping the option open is likely helping to anchor short-term interest rates and the NZD
  • The RBNZ’s revealed preference for QE, however, is clear and an expanded Large Scale Asset Purchase (LSAP) programme remains most likely if further stimulus is needed

A negative interest rate is a strange concept. Instead of being paid to deposit money, you are charged. But this is exactly what markets believe New Zealand banks will be faced with, from early next year, on their settlement account balances at the Reserve Bank of New Zealand (RBNZ). Our central bank continues to entertain the idea of a negative OCR as an option to further lower interest rates and provide additional economic stimulus. This was the message in this month’s Monetary Policy Statement (MPS), where the RBNZ almost doubled its Quantitative Easing (QE) or Large Scale Asset Purchase Programme (LSAP) to $60bn (20% of GDP) from $33bn. It came in response to an economic outlook where, even in its most optimistic “baseline” scenario, COVID-19 containment measures see GDP growth decline almost 24% this quarter, and the economy not producing at capacity until Q3 2022. In this scenario, the unemployment rate reaches 9% in Q3, house prices fall 9% this year and annual CPI inflation is briefly negative in Q1 2021.

More >