Top economists, business people and academics see a reduced need for negative interest rates ahead of the Reserve Bank's latest monetary policy review this week.
The RBNZ is expected to announce details of a new Funding for Lending Programme (FLP) on Wednesday (November 11), through which banks will be able to borrow cheaply directly from the RBNZ, and may or may not give further indications on whether the Official Cash Rate - currently on 0.25% - may go below zero in the New Year.
The NZ Institute of Economic Research has a panel of business people, economists and academics it styles as the 'Shadow Board'. And the Shadow Board members before each RBNZ monetary policy review share their expectations of what the RBNZ might do and comment on the situation.
The NZIER says that ahead of this week's review board members "once again saw a reduced need for a negative OCR and further QE [quantitative easing] over the coming year.
"The expected implementation of a Funding for Lending programme (FLP) by the Reserve Bank was highlighted by some Board members as an influence on their view about the need for further stimulus," the NZIER says.
"The aim of the FLP is to reduce borrowing costs for households and businesses in order to encourage them to borrow and invest. Shadow Board members continue to highlight the challenges facing New Zealand as it navigates the post-Covid recovery. However, members generally remain sceptical about the effectiveness of a negative OCR to stimulate the economy."
Negative rates 'very likely'
BNZ head of research and 'shadow board' member Stephen Toplis thinks it is "very likely" the OCR will go below zero over the next twelve months.
"However, we do not think that it is necessary," he says.
He notes, however, that the "big deal" in this monetary policy review is the Funding for Lending Programme not interest rates or QE.
Fellow 'board' member and Kiwibank chief economist Jarrod Kerr says the focus this week is purely on the FLP and how the RBNZ signal their next move - "most likely a 75bp cut to the OCR to -0.5% in February".
He goes on to say: "There’s a big difference between what I think they should do, and what they will do. I’m negative on negative rates."
Running out of bonds
And board member and Westpac chief economist Dominick Stephens says the RBNZ is "already on track to run out of bonds to buy under the QE programme", so QE probably can’t be expanded beyond the $100 billion already announced.
"This means that the RBNZ will need another method of keeping interest rates low. So we conclude that over the coming 12 months the RBNZ will introduce a Funding for Lending Programme and reduce the OCR below zero, while simultaneously slowing purchases under the QE programme."
Board member Viv Hall of Victoria University sees "still no case" for further monetary policy loosening.
"New Zealand's core CPI inflation continues to be low and stable. Immediate and foreseeable paths for employment and unemployment will not be materially improved by even looser monetary policy. Financial sector policies should be focussed on ameliorating asset price inflation, maintaining financial stability, and ensuring financial market liquidity."
'Key indicators below pre-Covid baseline'
The NZ country manager of software and business management company MYOB, Ingrid Cronin-Knight, (another board member) says several key indicators in MYOB’s Small Business Health index remain below the pre-Covid baseline for New Zealand’s SME community.
"Notably, according to our latest data, both cashflow (0.7% below 1st March baseline) and invoicing (16.5% below 1st March baseline) activity reveal that local businesses are still feeling the impact of Covid-19 and its related economic pressures.
"While we believe the RBNZ should avoid - and preferably publicly discount – moving towards a negative OCR, it remains likely that local SMEs will continue to look out for further fiscal stimulus, particularly after the Christmas and holiday periods."
And rounding out the comments from the NZIER shadow board members, environmental planning and design consultancy Boffa Miskell's chief executive Kerry Gupwell says there is a sense that the economy is rebounding quicker than expected from the last shut down.
"...But there are still some fundamental challenges as we continue to confront the effects of Covid.
"As the rest of the world continues to struggle with 'yoyoing' there are growing concerns over supply side issues for NZ, labour and imported items, which may hamper a recovery. The election result has given the new government a mandate, how we manage the border and help different industries transition into the next normal will be critical, and that will need to be more than just 'funding'.