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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

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

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.

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88 Comments

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.

That's actually an astute observation about the short term dynamic effects on consumer behaviour of signaling medium term OCR moves.

One good thing about New Zealand is that banks here have earned very high margins compared to international peers. Much as to say New Zealand banks could sustain a more negative OCR than a bank in Europe or the US where the competition is fierce which eats margins.

That's actually an astute observation about the short term dynamic effects on consumer behaviour of signaling medium term OCR moves.

Nudge theory in action

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Personally I think it's all about housing now. They're terrified that 'savings' (house prices) will be decimated. Jarrod is interesting but I noticed he is barely able to make the association between macro-economic policy and behavioral economics. They're stuck in this idea that the cheaper the credit, the more risk individuals, h'holds, and firms are going to take on. It's a flimsy assumption with no empirical justification. Case in point: Japan.

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It has been a pretty stupid idea to put most of families savings two overvalued asset types, namely stock (via Kiwisaver) but mostly housing markets, that's why.

The solution is not to make pay taxpayers with deposits or other types of cash savings for other people's mistakes.

If prices need a correction that is exactly what a free capitalist market is about, these manipulations just benefit those that had access to the market at some stage, making it more difficult to others to access later on.

Kiwi saver funds are typically not all stock and not all in the NZX either.

I have Aus Super which is 100% index tracking for no fees and my balance isn't that high yet. I also have super in NZ but not KS, that is balanced and only 15% is invested in the NZX.

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Everyone should study Japan, so they can't say they didn't see it coming. What's Orr's email address - he looks like a man going in eyes wide shut

It really seems they are more worried about kicking the ball for the next ones to pick up.

Another perspective is that they are simply trying counter the natural tendency that people have in uncertain times,... which is to hoard.
I don't mean that in a -ve sense. In uncertain times, people pull back on spending and try to save more.
Done in aggregate ( macro view ) ... it leads to a contraction.

Not sure why they might think house prices will be decimated..?
I think they know/see that Govt is kinda underwriting the economy, in regards to covid-19, with Fiscal largess.

I dont disagree, but as someone who is looking right now to buy if the right place comes up we will take it. This is a reality for many people as the market is running hot and there are no indicators beyond interest rates dropping a bit more as to what the market will do in 6 or 12 months. So from a pragmatic POV if someone is buying a house to live in the next 10-20yrs there is no point waiting for a further 50point drop in the interest rate 6 months from now.

Good luck

Plan on staying in wherever it is you buy for a lot longer than the current average of 7 years ( or is it 4 now? No matter...). 10-20? More like 50.
That might suit you ( or you may think it does, today) but what's coming is going to trap most, in situ.
That's why the OCR is going to where it is off to - so that the trapped can be held in place at zero cost.

Combined with the elimination of freedom of movement this whole govt power play has a sinister vibe to it.

Hulk
I agree totally with your rationale.
You will be buying a house for the long term and short term fluctuations - which are uncertain - are irrelevant provided you have job and income security and can service the mortgage. Although you will not likely own a home very long term, you will be buying and selling on the same market so this negates the then current state of the market and if not you just need to sit.
Many disagreeing with a proposal to cut the OCR simply see it as providing support for assets - such as stocks and the housing. As RBNZ has signaled the possibility (note "possibility" as nothing is certain) it is likely that there is more likely to be upward pressure on house prices over the next twelve months. This who were calling for wild house price falls of 50% and bubble bursts (and some have by their own admission have been doing so for 5 years) based on a poor economic have been proved wrong as falling interest rates and QE have far outweighed the other economic factors.
As for falling interest rates - given RBNZ comments on a negative OCR that is quite possible. For this reason fixing for 12 months would seem the logic thing - buy now knowing that there may be some rise in house prices, but also a likelihood of lower interest rates when your term renews.
While there are clear signals as to the likelihood of the next 12 months, there is no certainty. For this reason I would be paying down debt as quickly as possible; for example. I would resist the temptation of spending on renovations which many FHB typically do. Note that the risks are numerous - wider economic issues, job loss, injury and - while hopefully not likely - relationship breakdown - but we face risk every day in so many ways and are prudent.
The bottom line, you are buying a house for a home; that is about the intrinsic value and for family and financial security.
I wish you well.

Maybe. But.....( and to expand on mine above)
If you buy a home today and borrow, say, $1 million to do so, and the price does change by that 50% you discount above, ( and it does generally across the market. Ask yourself; Why else would Monetary Policy be as it is today if that wasn't a huge possibility?) then those who have bought will be trapped by not being able to sell and repay the lender what they owe ( some, of course, might be able to stump up with the additional $500k to repay the shortfall, but not most - even if they still have a job and their current wages structure).
So Interest-Only will become the norm to allow that $1 million to be held at 'no cost', but selling the property becomes impossible. The owner and all others in that situation will be trapped by negative equity, even if it cost nothing to stay put.
This was always going to be the End Game of lower and lower interest rate. What was unforeseeable was the health crisis, which has just extended the inevitable.
But those who buy today, are doing so into the face of more uncertainty than any of us have ever known.

bw
If that is how you feel that is fine.
I just keep hearing this repetitive scaremongering over the past few years. Foreign Buyer commented in April sums it up, "buy a house now and you will be everyone will be laughing at you and officially stoopied" - it ain't recent FHB people are laughing at.
So Bw, if you are renting, just keep doing. Your landlord will be ensuring that he/she is profiting off you, so just keep paying off his/her mortgage and let them walk away with the long term capital gain.

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I've rented for various reasons over the years, but consciously so twice; 2000-2002 ( Dot Comm bust made it sense) and 2008-2012 ( GFC made similar sense). In the interim I've owned and just downgraded to the lowest common denominator that suits us over that time. ( Oh, and I also haven't had a net mortgage debt since 1983, anyway....). I understand both sides of the ownership equation.
My comments aren't about property envy; they are about the lunacy of the financial settings of the last 12 odd years; settings that have brought us to unimaginable places, and ones yet to be experienced - none of them good.

One of the best comments/warnings I have read in lately. Currently looking for a "forever" home but something tells me to hold off.. rent for at least this time next year. Maybe bring the the yacht purchase forward..cheap as chips.

Maybe bring the the yacht purchase forward..cheap as chips.

Get a downpayment on the retirement village while you're at it

Thats the yacht..my instructions are to tip me over the side when I gaga.

Ashes to ashes...fish flakes to fish flakes.

Short of a depression there is no way housing will drop by 50%.. that is just farcical. Averaged over many(20-30) years (and across the country) housing has enjoyed roughly a 7-8% annual gross increase. Hogan was talking about a 50bps drop in interest costs not a 50% drop in prices.

Hook
Agree with you.
A 50% fall has been often been claimed. The issues in that most highly unlikely event are such that the whole wider economy would be in a state of carnage and mortgages a minor consideration.

Indeed they would. There is always a "chicken little" brigade member lurking. Conflicting advice about when or when not to purchase most peoples largest single asset has been around since day one. In the event a 50% fall occurred it would be anarchy and rioting in the streets and I for one would rather be in my own house (mortgaged or not) than a rental

It's interesting you only choose a 20-30 year time period (commonly done among spruikers cause it suits their narrative), that just happens to be associated with a gradual reduction in interest rates. Take it out over 50-100 years and accounting for inflation and house price growth isn't nearly as spectacular.

Taken over 50 years in NZ the results would still be roughly the same +/- a % or 2. Over 100 years would be hard because we don't have reliable data for NZ conditions and asset prices aren't easily comparable that far back even if we did

That's not difficult to understand given that period encompasses the majority of the period when interest rates started their decline, we came off the gold standard and thus debt levels went exponential. From an Australian perspective (and there is no reason NZ shouldn't be any different) house price growth was remarkably stable until the early 70's. Like I said, take it out 100 years and not so impressive.

https://www.macrobusiness.com.au/2014/12/the-history-of-australian-prope...

You obviously missed my subtle clue with the use of "NZ"more than once. Offshore data and case histories are irrelevant, which some on this site would do well to accept.

You would do well to post some data to support your assertions, otherwise it’s just opinion. Here I’ve done the work for you. Have a read of this paper and get back to me. In short, if NZ house price growth over the past 20 years had followed long term growth trends from the 60’s (earliest data was recorded) to early 2000,s then house prices would be half of what they are today.

https://briefingpapers.co.nz/house-prices-relative-to-inflation/

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So a thirty percent fall, taking the current median value back only 4 brief years to 2016, would be unacceptable and lead to anarchy and social breakdown ,yet the forty five percent rise over the same period is acceptable and has no relevance to societal or moral fairness .
Yesterday's update of RBNZ mortgage deferrals. https://www.rbnz.govt.nz/statistics/c65-bank-customer-lending-flows

The problem with that view is that you cannot control what the future provides. Even if you expect buying a house just to live in, you might need to change your plans, which might get you into negative equity territory when you need liquidity the most. Rents are going down too so not much point in purchasing right now.

b21
In that case you then just sit. I would also not be putting too much faith in falling rents - they are currently artificially high as they are supported by accommodation supplements.
And when are you suggest buying?? I have been reading posts like yours for a number of years on this site - "hold off, hold off, hold off" while property prices have just kept rising and FHB just get further behind.

That is easier said than done, sometimes people break up, accidents occur or need to move for work or personal issues.

I have not been a user of this website for as long as you say so it will be hard you would have read my posts for so long.

b21
OK be totally risk adverse then; don't drive or don't cross the road as the big red bus may get you . . . and don't venture out or Covid or some nasty virus or person will get you, . . . and probably best not get into a relationship.
Just keep paying rent, living in that dinghy flat, never ever certain that that knock on the door or phone call isn't your landlord giving you notice and you not only having the hassle of finding a new home at a time not at your choosing, quite likely having to shift your kids' schools, and breaking up your kids friendships.
So when should one buy a home; I see a lot of retired rents in their dinghy social houses still paying rent and struggling to survive on their pension.

As to you not posting long on this site, that will explain why you will not be aware of those that have been posting similar comments to yours - however they have since disappeared. Took a note of some of the negative comments regarding housing over the past few years; happy to list some of those if you wish. "Retired Poppy" for one . . . . but you wont know him.

You are making a lot of assumptions there my friend.

Also your argument uses an exaggeration fallacy so obvious that is not even worth replying to it.

b21
It is great to see the likes of Hulk making a commitment to getting ahead in life no doubt well aware of risks.
The comments in the lead article were that a negative OCR are on the cards which would result in asset price inflation including housing and the likelihood of falls in mortgage rates.
However, it concerns me that you and bw come in with exaggerated scaremongering comments.
P.S. If you want “exaggeration” look at bw’s 4.40 comment - $1million mortgage and 50% fall in house prices.

Actually b21, his point is very valid. If you sit there constantly waiting for the "right time", you'll be sitting in your rocking chair still waiting. There is no true "right" time because everyone has an opinion about "buy now" or "no.. wait". You buy when it's right for YOUR situation, if you listen to others to give you advice about when to buy then I'm afraid homeownership isn't really what suits you and you should just stay renting.

Agree with you. There is never going to be a right time, but there are indeed wrong times, these being usually uncertain times when assets are objectively overpriced. It is pretty obvious where we are now, I have seen pretty much an identical behavior of the market (and people) right before the GFC, when there is wave of denial just before everything becomes obvious to everyone just because too many people are just having too much fun, then everybody will say they saw it coming and that the way everything worked was unsustainable. Of course everyone has different backgrounds and are free to act as they please.

I am really on the fence about this. I've been expecting housing to fall for a long time - because it is, as you say, objectively overpriced. It has been for ages. It makes little sense. But there it is. And in the face of economic disaster, it hasn't faltered. What can you do when the truth is stranger than fiction?

You are looking at the GFC with the benefit of hindsight, something not available to you at this point. Everything became obvious after the fact , actually about 2-3 years after the fact. The GFC wasn't caused by "people having too much fun" ( actually wish it was, could have been the 60's reborn!)
The fact is, it's very unlikely there is a "wrong "time to purchase a home because over time it flattens out. I bought my first home when interest rates were at 17%, but I bought it anyway because it was right for me to do so then. It's not a financial market timing thing.. it's a personal financial situation thing

There is a 'wrong' time in that sometimes buying even 6 months later or 6 months earlier than you did buy means you would have been hundreds of thousands of dollars better off (taking into account purchase price and interest). The problem is it's very difficult to know that it is the wrong time.

I'm looking at building my first home instead of buying. With all this talk of possible negative equity, I wonder if anyone has thoughts on construction costs for housing over changing market rates for same?

Builders are all pretty busy at the moment with low interest rates encouraging homeowners to upgrade. It might be a different story for new builds though, as different financing rules and lack of confidence could affect their potential customers. I can't see construction costs dropping, especially while Level2/3 restrictions impact labour efficiency by restricting who can be on a building site at any given time.
Remember that the banks lending to new builds is very different to simply releasing the funds for a purchase, so it makes a difference whether you engage a company to build for you, or buy land and arrange your own build.
Try them out, get quotes, ask for a fixed price land and build option and you'll see how desperate (or not) they are.

Thanks for this. Yes the journey with the bank(s) has been 'interesting'. I'm a single Penguin but a bank like Westpac for instance, calculates on costs for a couple as the default. Whilst the reason I received was in relation to an Ozzie legal case some years back where a court ruled that the bank had not done it's due dilligence in anticipating a single person might become part of a couple, this for me is a smokescreen for the recent reluctance of banks to lend to first timers. They don't really want my trade in terms of risk aversion - their margins of servicing capacity has jumped from December to the present - it's only when they realised that the amount I want from them is one third of the land's CV that (that's without any improvements), have they been willing to take on the risk.

.... but there's no gain without risk.

I have 38 years experience in residential building. Currently its rare that a week goes by without receiving notification of cost increases in some item of labour or material. So yes, the cost of residential building will rise

I guess you meant the cost of NEW residential building.

Yep, cause it's pretty hard to build "OLD" residential buildings now LOL.

b21, "Hi Mr builder, I have a piece of land (or a renovation), I want you to build (or renovate) a new building but I mean an old one, well, a new one but I will pay your wages at rates from 20 years ago, same for the material, I will pay prices of 20 years ago too. Genius way to save money!

Thanks for your thoughts folks. I already own the land and live entirely off grid in a hut. A number of builders I've spoken with say they're busy now but foresee a slowdown in 12 to 18 months time as there's a lack of future interest.

So it looks like one of those interesting dynamics again where different aspects pull on each other: time (hope Covid levels decrease to bring down compliance costs and import delays); increasing materials cost over time; and availability of building labour.

... so with the danger of negative equity in the horizon, I'm still jumping into asset investment! Practice is always different to theory...

Hulk, I have to say something here, you are getting some real catastrophic advice here, like why buy now when interest rates are expected to fall by next year? That's exactly when you buy because lower interest rates lead to higher asset prices, even A Orr admitted that, so that by the time the interest rate drop and a lot more purchasers want to buy, you have already bought your house at the cheaper price of today. I'm sorry but b21 and bf's logic is totally flawed and listening to them will cost you many $100'000.
Choose carefully who you listen to, listen to someone who has many years experience in the NZ housing market, listen to someone who has a good track record of predicting house prices correctly

Your narrative makes no sense whatsoever, sorry but that's the way it is.

Why would anyone in the midst of a global pandemic get locked in hundreds of thousands of debt with high risk of getting in negative equity territory when both assets and interest rates are expected to be lower and uncertainty about the future might dissipate next year? What you propose is the perfect cocktail of irresponsible lending at the top of a bubble.

Even A Orr knows that, they are just trying to push the problem further in the future.

There are a handful of RE bulls like you on these forums, listening to your advice will benefit some sure, but not buyers of course.

My narrative makes perfect sense, you just don't understand it.
But what matters the most is to not steer FHB into the wrong direction, because it will cost them $100'000's. If you're too afraid to buy a house now, that's fine, that's your choice but do not encourage other FHB into being a perpetual renter because of your fears.

So you are actually trying to STEER people into some direction?

Please do not patronize me, you obviously have a poor understanding of how basic concepts of economy work and keep giving ill advice to others based on what seems some vested interest, copying the narrative of the RE and banking lobbies no matter what the economic indicators are.

Not being funny but Yvil has just sold his house and is renting, so telling others to buy now and not wait is a bit do as i say but not as i do!

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.

I will add to that. Unfortunately, bubble economics promotes wage growth as well. Therefore, you can have wage suppression and strong wage growth simultaneously. If the bubble mechanism breaks, then you move to wage suppression through trade but also negative income growth through lower velocity of money flowing the economy.

You actually believe that myopic socialist mantra?? Shame, cos it's not even close to reality

Who elected Trump? Disenfranchised "rust belyers" who had seen their communities decimated by "off shoring" manurfactuing. What was Trumps platform? Jobs, Trade and a Wall. Was he right about Jobs and Trade? Yes. Was he right about anything else. Probably not. Is he socialist? ...hmm maybe.

Got a bit offtrack from your first diatribe. But while you're on the subject.. manufacturing was offshored in the US (and here) because the resultant quality was higher, and the cost to the consumer was lower. The "rust belt" built poorly finished and expensive cars that people didn't want to buy. Here in NZ F&P built robust but expensive appliances that people liked but couldn't afford. It's not the govt or socialism or banks (central or other) that drive manufacturing offshore.. it's consumer behavior.

Here in NZ F&P built robust but expensive appliances that people liked but couldn't afford. It's not the govt or socialism or banks (central or other) that drive manufacturing offshore.. it's consumer behavior.

Nonsense. The reason why F&P 'went offshore' is because the company was taken over by Haier.

Why? Because the machines could be made cheaper where everything else is made. Look up Hokou System.

https://en.wikipedia.org/wiki/Haier

https://nhglobalpartners.com/the-chinese-hukou-system-explained/

Agree, Hook. A friend's father used to manufacture electric blankets - not cheap but every part was replaceable from locally available components. Still in use after thirty years, but couldn't match the price of cheap imported items, so went to the wall. Problem was that consumers wouldn't pay a premium for quality, along with the perception that some goods had moved down the value chain from being major purchases to being commodities.

You don't know it but you are making my argument. Low interest rates are the result of the success of first Japan then China and then Germany to generate massive trade surpluses by suppressing wages. And anyone can see how suppressed wages get exported. You've set out the process yourselves above. Of course it can be explained in more formal language using the jargon of economics but that changes nothing and adds very little.

All the answers right here but you'll never unpack it...without a lot of hard work.

https://phenomenalworld.org/analysis/the-class-politics-of-the-dollar-sy...

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-...

Many studies show very low interest rates do not improve economic outcomes over time just inflate asset prices

NZ wants improved economic outcomes AND inflated asset prices. Sweden and Japan both share a common element: a strong industrial base. NZ does not.

It's crazy. The reduction in rates and prices are well correlated. So affordability is no better but now your grandmother has no return on her TD to buy groceries or pay for power.

Boomers would have planned with the assumption of at least a 4% ROC to support them in retirement. Where will this come from now? It will have to be asset sales and consumption of the principle.

What makes you think asset sales and principle consumption aren't part of the plan to start with? Most retirees I know are spending to ensure they don't hit the Retirement Home with more than 250-300K nett.

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.

Great post. Someone is thinking about behavioral economics and the validity of nudge theory. The only point that we can at least validate is that NZers (and Aussies) are predisposed to high levels of private debt. We're all in there 'having a go', living paycheck to paycheck, and listen to sagely advice such as 'there is good debt and bad debt' (usually from vested interests who make their livelihood in seeing the great unwashed live as close as possible to breaking point).

The great unwashed and financially illiterate don't need any advice.. they are more than capable of authoring their own demise.
https://www.stuff.co.nz/business/money/122542786

Well that's a bit ironic. The finance industry is now being critical of people's spending habits (splendid timing when we need more spending than ever before), yet those same people are being encouraged and coaxed to take on more debt by RBNZ, the retail banks, and the govt.

"The present conditions, as I see it, are to keep the banking system alive"

Yes
House prices are an irrelevant symptom of no wage growth
The surplus isnt there to grow wages (and hold demand up)
So we have to resort to "income" through ever increasing leverage, deficits & QE
Theres only one way this ends
the collapse of fiat
at which point house prices are totally irrelevant

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.

You can possibly buy foreign currency denominated funds if you wish. Then there is Bitcoin and gold.

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_n...

And ASB's parent, CBA:
"Commonwealth Bank says its most over-leveraged borrowers – those whose prospects for returning to work after the coronavirus look the bleakest – could be encouraged to downsize the family home or sell multiple investment properties."
And then there's the RBA:
High household debt and falling house prices during the COVID-19 recession will cause consumers to cut their spending and exacerbate the economic downturn, according to new research by the Reserve Bank of Australia.

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

The problem is, what do the retired do with their money when bank returns are low? Go and buy another rental, that's what. So if you want a home to live in, that will just make things worse in terms of demand (and therefore prices).

What sort of comment is that?
Do you think investment properties are a sure bet?
Retirees no longer have an income so they can't borrow to buy
To buy a decent investment property without borrowing they will need approx $1 million cash equity
How many retirees have $1 million in loose change lying around?
Unless you buy in Invercargill and Bluff - but even those areas are no longer safe

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.

Just out of interest, what in your opinion is the difference between a furlough and a wage subsidy? And.. it almost sounds as if you're arguing for stronger (but not too strong) unionisation? Corporatised Unions perhaps? Reminds me of Henry Ford.

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?

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