Reserve Bank Governor Adrian Orr says he doesn't think New Zealand's banks would actually be ready to manage negative interest rates.
His comment came at a media conference on Monday following the RBNZ's decision to slash the Official Cash Rate from 1% to just 0.25%, with a pledge that the OCR will be kept at that level for 12 months.
As interest rates move towards zero that opens up the requirement for the central bank to utilise unconventional monetary tools.
Theoretically that could include moving to negative interest rates.
However, Orr says the RBNZ's thinking is that if and when further monetary stimulus is required "we think the most effective tool would be the large scale asset purchases".
“I think in a simple sense not all banks are ready to even actually manage negative interest rates," he said.
"We ourselves at the Reserve Bank are ready. But not all retail banks are ready.
"....And we want them to be focusing on more important issues at this time rather than that readiness. More important issues around looking after their customers.”
The RBNZ's preferred approach therefore should more monetary policy assistance be acquired during the current economic crisis will be at least in the first instance large-scale buying of Government bonds to pump liquidity into the system.
Assistant Governor Christian Hawkesby said the RBNZ was in close contact with the country's banks and they were telling the RBNZ they are well-funded.
“They are not asking for more liquidity but we making it very clear to them that it is available if needed.”
The RBNZ didn't want to be drawn on whether New Zealand would go into a recession - though Governor Orr did say that some of the many scenarios they were currently working on did have NZ experiencing more than two quarters of negative growth (the technical definition of a recession).
On growth and inflation, Orr's comment was: “We are expecting growth and inflation to be lower.”
Deputy Governor Geoff Bascand said the central bank did expect the current crisis: “to be a severe impact on the economy and on people.”
“That’s the unfortunate circumstance that we are in.
"We don’t have specific numbers…but we are saying that this is going to spill through some business failures and some unemployment. That is what we are trying to lean against and provide support for the economy.
“...We acknowledge this will harm a number of people and the New Zealand economy."
Orr noted that New Zealand currently had only small numbers of virus cases. If NZ ultimately gets a wide outbreak it would be “a whole different ballgame again”.
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