Kiwibank chief economist Jarrod Kerr walks through the concept of a negative OCR, what it will mean for borrowers, savers, lenders, the government and the NZ$, and where we might go from there

The perspective of lower rates in the near term might already be hurting the property market since the expectation of lower future rates might delay plans, that added to the expectation of lower property prices adds double pressure to falling prices. This also hurts those who have been able to put some savings aside while benefiting those with mortgages they could not afford in the first place.

Free money, for banks, means there is far too much money with nothing to do. Why? Because there is no demand for things. Why? Because people who would buy stuff can't afford to. Why? Because wages are too low. Why? Because of wage suppression. Why. Because every country wants a trade surplus and wage suppression is the way to get one. Which countries have the worst wage suppression? Just ask yourself where all the stuff you buy gets made.

Seems like scraping the bottom of the barrel furthermore the Swedish experiment wasn't postive.
Many studies show very low interest rates do not improve economic outcomes over time just inflate asset prices
https://voxeu.org/article/swedish-experience-negative-central-bank-rates
https://www.bloomberg.com/opinion/articles/2019-12-19/sweden-s-riksbank…

Nice interview Gareth. In response to your question "Are negative interest rates here to stay?", Jarrod talks about the work he has done on historical changes in demographics, and savings habits and suggests people saving more has had a downward pressure on interest rates. Jarrod, high levels of savings has never influenced interest rates. Also, you say people need to be encouraged by low interest rates to borrow. Not true as you put it. People will borrow if they feel safe to do so. When interest rates are low, assets become over-priced, and a prudent (or sensible borrower) will think twice, especially during normal economic cycles. When interest rates are high, asset prices are low and possibly bargains meaning you are much better placed. Smaller loan, higher rate, but enormous potential appreciation without risk.
The present conditions, as I see it, are to keep the banking system alive by coercing borrowing and risk taking.
Inflation is not always a by-product of money creation by Q.E. or any other excuse for expanding the money supply. Encouraging first-timer house buyers irresponsibly to borrow money into existence at inflated asset prices purely to satisfy the balance-sheets of the banks, enormous government funded public works and subsidies, may all just result in deflation instead.

Negative OCR and what it means for NZ Savers; Is move your money to another Western country that actually has a Savers Protection Scheme (All banks in the Western world except NZ) because NZ does not have any protection for banking collapse.

What's the definition of insanity? This hasn't worked overseas so why should we be different. Lower and lower rates only signals to the public that the economy is in the crapper and people become less likely to spend into the productive economy.

When you have the CEO of NAB telling homeowners under financial stress to get out now you know things are heading south.

https://www.reddit.com/r/AusFinance/comments/ifjtqm/scott_papes_latest_…

Just because the OCR does go negative doesn't mean the banks follow suit. The banks have a lower limit end of story. The lending risks for them are going up so no way they want their returns to decrease would you ? As the risk increases they want higher returns. Risks for bank deposits are also starting to rise so if it drops much more people are going to start pulling their money out. It gets to a tipping point where it all seizes up.

This has a pervading air of RBNZ big-banking big-picture Macro-Economics
There is a presumption "the 1984 people" will go out and borrow and spend and consume
Central Bankers and academics have been discussing negative interest rates for 10 years
Forces people to do a bit more with their cash
Push people into riskier assets and "hopefully" stimulate economic activity
(nb1: shifting cash into assets does not stimulate economic activity)
(nb2: forcing savings into consumption is the main economic lever)
(nb3: encourage borrowers to borrow to consume)
A negative interest rate becomes a tax on bank capital
A negative interest rate is a charge on funding whether wholesale funders or retail savers

Funding For Lending
Government lends to retail banks at say 0.25% with the proviso that it is lent out to retail borrowers at say (guessing) 1%. Kerr says that's the way of the future, but it is also a future problem when the government comes to unwind it. On the face of it this is counterproductive to negative interest rates. While This funding is in play, negative rates won't happen

Mr Kerr. I would be interested in borrowing $2 million fixed at 1% but has to be for a fixed term of 25 years.
You interested.?

An excellent interview
A good start. Needs more work

At 0.0% or even 0.1% interest paid on savings, the savers and the retired and the elderly have had their incomes confiscated. As a large cohort in the consumer economy they no longer have the income with which to consume

Right now you would have to pay me to borrow

Nice interview.
I agree with Jarrod that a negative OCR would be very significant in terms of the NZ dollar.
Quite different to Roger J Kerr who has said it won't have much impact.

Coming avalanches ......... is going to be huge catastrophe where humans never seen before.

RBNZ Negative Cash Rate?

Personally I’m amazed that the RBNZ is even considering this approach given how poorly this has worked in multiple countries. I feel that central banks have carried so much responsibility for the level of activity in the last twenty years and they have pretty much come to end of the road by pursuing monetary policy. Central bank mandates going forward should be to support fiscal policy de facto in a responsible/constructive way that is responsive.
If their reasoning is deflation which we now know is very difficult to regenerate once deflation has set in. Given for the 1950s 60s ,70s and 80s Central Banks spent much of their time leaning against inflation they have now tried absolutely everything to rekindle it with Japan being a case in point. I feel these central bankers place too much weight on the Friedmanite observation that " inflation is everywhere a monetary phenomenon ". It is a truism in one sense whereby show me an economy with rapid inflation I will show that the money supply is growing very fast ..but this pushes back to the question of what makes the money supply grow very fast ..it can be many things.
Certainly, there is very little doubt that if you have strong trade unions and or strong wage indexation such as we had in the 1970s then inflation is a self-perpetuating phenomenon ..if you experience something like an oil shock which we had in 1973-74 pushes the price level up several % points that is fed automatically into wage increases by agreements and these are fed back into prices then we have a wage rice spiral.
Also, strong unionization because of a bargain was a dominant factor...very weak now as we now have the service and gig economies and a general fragmentation of unions. There is very little ability of wage earners to raise prices currently so even prior to Covid it was hard to see inflationary impulse getting under way.
Why should negative rates be effective then as a further monetary tool when its success offshore has been dismal to say the least namely Europe and Japan. The urban myth that large scale asset purchases and money printing (QE) will generate large inflation has been shown to be incorrect or ineffectual at best given how much has been thrown at the problem already.

My view is more likely than not the risk is there will be less inflation in upcoming years unless monetary and fiscal policy is coupled here that people expect. Central banks are not the only show in town. The debt issuance and money printing argument bandied about mainly by the buyside community to be frank can be seen to be looking for a big macro theme. I feel this will be far outweighed by many factors related to the sheer difficulty on generating wage price spirals and rekindling inflation which will be even more exacerbated by solely pursuing a monetary path.
There is no doubt yes that a modest amount of inflation e.g. 2% does grease the wheels as if it does nothing else it gives central banks the opportunity to hike rates into mildly positive territory which gives them scope to then cut them when they need to support the economy. If inflation is at zero and rates are negative as they are in many foreign bond yields that really neuters monetary policy from having any effect.
Central Banks have become seen to be the only game in town and that for any cause of economic malaise in an economy the answer must be Central Bank easing. I think this is a serious analytical mistake as there are many reasons econ growth can be weak can be short term cyclical forces where monetary policy is appropriate.
Others are more long term structural where monetary policy isn't the answer and in the current situation of a govt enforced lockdown of the economy. I don’t think monetary easing is particularly relevant whatsoever its just the muscle memory that isn’t the correct antidote.
What is needed in this instance is fiscal policy not by tax cuts but by transfers to businesses from the state akin to furlough schemes etc which have been very good to date in the government enforced lockdowns. Negative rates are not a good answer if in fact Central Banks want to print more money, they can do so by buying more central govt debt of which there will be no shortage. There will lots to buy without ever getting into the territory of quasi fiscal policy.
The risk of negative rates here is that reflects a view that what we are suffering from a broad economic downturn from which the recipe must be more monetary easing. Personally, I find this ridiculous the idea that interest rates are holding back spending. The current economic weakness is partly due to the mandated shutdown of world economies and as we move forwards its reflecting a lack of confidence about how safe it is to carry out normal activities.
Neither of these are related to benefits that monetary policy is supposed to bring about. Cuts to negative interest rate levels just do not capture what is happening right now.

Hey, Gareth Vaughan and Jarrod Kerr
The Government run Rent Tribunal collects rental bonds and holds them in an interest bearing pool that funds the Tribunal itself. A rough calculation suggests that pool is somewhere a little bit north of NZD $1 billion. Much the same as Bonus Bonus scheme it will be struggling. Its operating revenue stream is being decimated. Has there been any examination of that?