By Gareth Vaughan
The Reserve Bank is actively preparing to take the Official Cash Rate (OCR) below zero.
Currently the OCR is at 0.25%, a record low and where it has been since the onset of the COVID-19 crisis in March.
Earlier this month the Reserve Bank indicated a negative OCR, alongside a “Funding for Lending Programme” offering low-cost, secured, long-term funding for banks, is on the cards next year.
In March Reserve Bank Deputy Governor and General Manager for Financial Stability Geoff Bascand told interest.co.nz banks’ computer systems weren’t set up to deal with negative interest rates. Additionally some contracts they have need to be updated. Subsequently the Reserve Bank wrote to bank CEOs in May saying it wanted them prepared for negative interest rates by December 1.
In the letter Bascand said towards the end of 2020, the Reserve Bank plans to assess banks’ capability to operate with zero or negative interest rates. This assessment, Bascand added, would include the likes of the Reserve Bank’s standing facilities, a range of financial market securities such as bank bills, bonds, interest rate swaps, and derivatives, and all products relating to non-retail customers.
"[But] based on international evidence, interest rates on retail products have tended to be bound by zero and we do not expect banks’ retail systems and documentation to be prepared for negative interest rates," Bascand said in the letter.
In the meantime the Reserve Bank is undertaking a quantitative easing programme, buying central and local government bonds with newly issued money. It plans to buy up to $100 billion worth by June 2022. The aim of this policy is to help ensure low retail interest rates in order to meet the Reserve Bank's inflation and employment targets.
Against this backdrop I asked Kiwibank chief economist Jarrod Kerr in a Zoom interview to walk us through the concept of a negative OCR, starting by explaining what the OCR itself actually is. In the video we talk through why the OCR may go negative, what the impact of this will be on borrowing and savings interest rates, on lenders, government debt, the New Zealand dollar, and the Reserve Bank.
I also asked Kerr what the overseas learnings from negative interest rates are, whether they may become the new normal in NZ, just how negative we may go, and what he thinks the Reserve Bank will do next, and what it should do next.