The Reserve Bank's not expected to make any changes to either interest rates or its QE programme this week, but the markets will be looking for any further clues about the potential arrival of negative interest rates next year

The Reserve Bank's not expected to make any changes to either interest rates or its QE programme this week, but the markets will be looking for any further clues about the potential arrival of negative interest rates next year
Adrian Orr keeps the money flowing. Illustration by Ross Payne.

There will be little change but plenty to discuss when the Reserve Bank releases its latest monetary policy review on Wednesday (September 23).

At its previous review on August 12 the RBNZ did a significant amount of heavy lifting; raising the size of its QE (money printing) programme to $100 billion and more clearly signposting a move next year into negative interest rates. The August review was accompanied by a full Monetary Policy Statement. The central bank has shown a preference for making major policy changes during an MPS review - so that the reasons for the moves can be fully explained and outlined.

So, with so much done in the previous review, that leaves the statement on Wednesday as more than likely a 'placeholder', a reiteration of the key messages and general direction. Although, having said that, it is fair to say that under this Governor, Adrian 'shock and' Orr, the RBNZ has tended to err on the side of adventure with its movements and statements.

Of great interest for the markets will be whether there's any apparent evolution in this statement on the thinking over the negative interest rates. On August 12 Orr said the bank's Monetary Policy Committee had expressed a preference for considering a package of a negative Official Cash Rate (OCR) and a ‘Funding for Lending Programme’ (FLP) in addition to the current Large Scale Asset Purchase (LSAP) programme (QE). The Committee had instructed staff to prepare advice on the design of a package for deployment if deemed necessary, taking account of the operational readiness of the financial system.

The RBNZ smashed the OCR down to a new record low of just 0.25% (from 1%) in March as the Covid crisis hit in earnest. At the time the central bank pledged to keep the OCR at 0.25% for 12 months - IE till next March. But with the RBNZ having consistently since not ruling out negative rates, and with the August statement saying so implicitly that the RBNZ was now preparing for negative rates, the markets have been abuzz with speculation that the dropping of the OCR will happen earlier.

ASB senior economist Mike Jones, in a preview of this week's RBNZ review, said key for market watchers will be whether the RBNZ sticks to its forward guidance that the OCR will be left where it is until March next year.

"The guidance was reiterated again in August: 'the Official Cash Rate (OCR) is being held at 0.25% in accordance with the guidance issued on 16 March'. We expect that this line will broadly be retained, Jones said.

Markets are toying with the idea

"But the risk, if any, is that the guidance could be softened a little. Markets are already toying with the idea. Pricing is now consistent with a better-than-even chance of the OCR being reduced to zero by February (18 bps of cuts priced). Any softening in the Bank’s forward guidance would see markets move to front-load OCR cuts even further," he said.

Jones said the RBNZ was now busy consulting, investigating, and designing alternative monetary policy tools.

"Banks have been instructed to be ready for a negative OCR by the end of the year. Should all of this work turn up a package of tools that is both effective and operationally ready, and there is no material improvement in the economic outlook, there is a chance the Bank moves on additional policy easing before March of next year. In other words, we think the market is right to price a chance of earlier easing.

"Adding to the potential for an earlier move is the fact that the OCR announcement dates have shifted, with the next scheduled OCR announcement after the February MPS (February 24) not coming until April 14. In recent communications the RBNZ has explicitly linked the prospect of a negative OCR with a Funding for Lending Programme (FLP) which would see the RBNZ directly fund banks at the prevailing OCR rate. We remain of the view that a FLP scheme should be put in place earlier than March. The timely success of such a scheme partly rests on banks having a long enough lead time to factor such a programme into their funding plans."

'Slightly awkward'

ANZ chief economist Sharon Zollner takes a somewhat different view on the debate. She notes that the 12 month timeframe the RBNZ gave itself on the OCR  is "slightly awkward" as the commitment was made at an emergency MPC meeting between official review times.

"The [12 month] deadline falls between a Monetary Policy Statement on 24 February, and a Monetary Policy Review in mid-April," she said.

"The market has therefore started pondering whether 'close enough' might be 'good enough', putting February in play, despite the RBNZ’s frequent reiteration of its guidance.

"In a macroeconomic sense, a few weeks is neither here nor there. However, in a strategic sense, it matters. The RBNZ will be concerned that breaching their word, no matter how trivially, would undermine the power of forward guidance going forward. As the recovery evolves, convincing the market that they won’t raise the OCR for a period come hell or higher inflation will be important for keeping long-term interest rates low. The RBNZ has taken a 'least regrets' approach to policymaking in recent times – we believe they will conclude that they would regret damaging their credibility more than they’d regret a few weeks of delay."

'Adamant in their need...'

But offering another perspective again are the Kiwibank economists, who said the RBNZ seem "adamant in their need to go negative", even if they made an early and effective use of the FLP.

"We believe the RBNZ has seen enough to warrant taking such a risk. Although we disagree, the RBNZ are likely to take the cash rate negative next year," they said.

The Kiwibank economists believe that if a central bank is to execute a negative interest rate strategy "it must be done with some bluster".

"A 75 bp cut [of the OCR] to -0.5% in February is expected, and more likely than April (or May), in our view."

Westpac chief economist Dominick Stephens said he expected that the RBNZ would simply state that design work on a package of negative interest rates and FLP is ongoing.

'There are tools...'

"The RBNZ will reiterate that if the economic situation warrants it, there are tools with which it could ease monetary policy. But there will be no signal that these tools are about to be deployed. Back in March the RBNZ committed to keeping the OCR unchanged at 0.25% for a year – we firmly expect the RBNZ to issue a reminder of that commitment...".

Stephens noted that the RBNZ's new MPC structure for making monetary policy decisions has been in place for a year and a half now, "and some clear patterns have emerged".

"The MPC has a predilection for making big bold changes to monetary policy, less frequently. The gradual approach is not favoured. When the need for a change in monetary policy has been identified, the MPC has tended to frontload the entire change into a single large move (this contrasts to previous RBNZ Governors, who tended to move part way and signal there was more to come). Given that a big bold change was made at the August MPS, it seems less likely that the MPC will make another change now."

Stephens said another pattern is that the MPC has never changed monetary policy at a review without a Monetary Policy Statement. 

"Monetary policy has been altered at four out of six Monetary Policy Statements decided by the MPC, and there were two unscheduled changes during the most dramatic days of the Covid-19 epidemic. But of the four OCR Reviews or [Monetary Policy Reviews], one was cancelled and the other three have featured no change in monetary policy. This makes a change in monetary policy next week seem even more unlikely.

'No need to loosen'

"Finally, the recent period of stronger [economic] data means the RBNZ won’t see any need to loosen monetary policy further at this stage. In normal times, a period of stronger data could prompt a tightening of monetary policy, or at least a change in communications. But these are not normal times. The risks to the outlook are huge, swamping the significance of the recent stronger data. Also, the RBNZ is operating a 'least regrets' strategy – it is happy to take the risk of inflation and employment overshooting target, but wants to do everything possible to avoid major undershoots on either target. That means it will happily bank the news of stronger data rather than reacting to it."

ANZ's Zollner said this week's RBNZ policy review "is something of a placeholder", but the RBNZ might hope to put a little downward pressure on the long end of the interest rate yield curve via a dovish tone and a reminder that it now has the ability to take a more tactical approach to its weekly bond purchases.

"For the short end [of the curve], any weakening of the commitment to keep the OCR unchanged until March would certainly cause a flurry of excitement, but this is not our expectation."

The Kiwibank economists say their preference would be to 'unwrap' the RBNZ's 'package' of negative interest rates and the FLP - the funding for lending programme.

"We recommend unpackaging the deal, and going with what works without (major) consequences. Focus on the FLP now, and consider [negative rates] later. We have been banging the drum on a bank FLP as the next best tool in the shed. The good thing about the FLP, is the timing. The RBNZ has committed to doing nothing with the OCR until March 2021. The FLP could be started in November, to get the ball rolling. And if FLP is not enough..."

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

23 Comments

Do we all understand what the above is all pointing to?
"The risks to the outlook are huge.... (the RBNZ) is happy to take the risk of inflation and employment overshooting target, but wants to do everything possible to avoid major undershoots on either target.
Inflation; as in CPI Inflation, isn't going to overshoot, is it?! Otherwise, it would have at some stage in the last decade or so.
Deflation is baked in. Wage reductions, both nominal and real, are baked in.
That's what the low cost of money is telling us - there is nothing worth risking even 'free' money on.
Any optimistic asset price increases in the short term are going to strip the economy of any liquidity and/or borrowing power left; disposable income is going to shrink, and interest rates at 1%, 0% or minus 10% aren't going to help.
They will just confirm what we already know.
The price of everything is going to be reset - and upwards isn't it.

Food more expensive, flights up, electronics up. House prices up. But we will not have any inflation.

House prices up is a Gain. Flights and Electronics are part luxuries. Only Food we should worry about.

House prices up via central policy is a wealth transfer.

14
up

Australia and USA say NO to negative interest rates as they have NOT WORKED anywhere but Orr wants to have them in a last ditch effort to save the debt fueled who cant live within their means. Orr we will do anything to keep house prices up. Let the market clean it out and stop houses prices being held up by artificial QE money printing. It will only end badly and perhaps even worse down the road....

What happened with last fed announcement (As could do nothing much) will be same here in NZ

Jones said the RBNZ was now busy consulting, investigating, and designing alternative monetary policy tools.

To achieve what exactly?

To achieve what exactly?

How to further boost the housing and stock market and God forbids, if it falls, which it will evantually than how to support by deferring mortage payment or by giving $100000 Grant to all home buyers :) including existing buyers.

The longer this all goes on the more I realise that globally central banks have no idea what they're doing and are literally flying by the seat of their pants and hoping for the best. They've backed themselves right into a corner and each time they save the markets they push themselves further into said corner - it must be getting claustrophobic in there.

Free money is coming will you use it correctly?

Hand on Heart, I will spend wisely, Sir.

RBNZ may have given guidance of keeping OCR at 25bps til Q1 but that was always subject to change.

I'd be surprised if we aren't at zero OCR by Xmas.

LSAP has been significant and the 3 to 5 tenure is already negative. Surely at that level of intervention purely for consistency an OCR cut would be mandatory.

Even at 1% mortgage interest rates you still need to repay the principal on your jumbo sized mortgage, so not a full bailout for borrowers.

Yep, even with no interest an $800k mortgage would cost you $520/week in repayments.

Consequences of the path RBNZ is taking:

1/ financial repression.... transfer of wealth from savers to borrowers.
2/Consumption of Capital... People who rely on interest income will start to spend their Capital, to pay the bills.
3/ Acceleration of Wealth inequality. ( will reach extremes).
4/ The seeds of extreme instability are being sown. ( Minskys ideas)
5/ There will be very little "robustness" and vitality left in economy. We are moving towards a "zombie"
economy, which is the metaphor for an economy that struggles with a debt burden.
6/Assets prices will have a "crackup" boom. ( Happening now ). The FED did its extraordinary monetary policy tools, AFTER a real estate crash...whereas RBNZ is doing it in the middle of a strong NZ real estate mkt.

7/ All of this will lead us into our own version of a GFC , where a Real estate downturn will precipitate a serious economic downturn. We will face real monetary deflation... ( credit contraction).

This is not really a prediction.... Its whats happened in USA and Europe going into the GFC and the responses to the GFC.
The strange thing is that the RBNZ is using the powerful Monetary tools , (which the FED used in dealing with the GFC), now,.... so that a few years down the track they will have very little left to deal with a real GFC moment that NZ will probably have.
We will have both high private sector debt /GDP levels and highish Govt debt/GDP levels... and people with debt might not have much" robustness" to handle some "rainy days"

Maybe exports will save us.??
As far as I can see , only 2 things will limit the RBNZ going down the Money printing / ultra low interest path.
CPI inflation and a collapsing NZ dollar...

How would people react if we started imposing price and wage freezes..?? I think most people realize that these things dont work. They are clumsy , distortionary, and dumb solutions to symptoms. The higher order effects of price and wage freezes become evident , pretty soon.
I'd suggest that Central Bank actions are in the same category... A highly contrived , command style of trying to manipulate an economy.

RBNZ is actually choosing winners and losers...
If I could borrow money at 0.25% , fixed for 3 yrs.... could I get rich within 3 yrs..??
RBNZ is a bankers best friend ! eg.
https://www.rbnz.govt.nz/markets-and-payments/domestic-markets/domestic-...

Assets prices will have a "crackup" boom. ( Happening now ). The FED did its extraordinary monetary policy tools, AFTER a real estate crash...whereas RBNZ is doing it in the middle of a strong NZ real estate mkt.

Very good point.

'Price and wage freezes'.
Aren't they used only in a very high inflation scenario. I think Reagan used it in the US.
We are now in deflation, may be sliding to a mild depression.
No chance of freeze. May be free money to supplement wages, to boose spending.
Inflation dragon has been slayed and will stay slayed for a few more years, I think.

So if I understand this correctly, if we get negative interest rates that will:
a) Become a cost to savers... you have to PAY banks to hold YOUR cash,
b) Banks then use fractional reserve banking to leverage the money and lend it to other people and charge them interest on it
c) Debtors get subsidised to have debt at savers expense

Why would you save in that scenario?

Deposit rates won’t go negative. You will still get a minuscule amount of interest paid. But after tax and accounting for inflation, you will be going backwards in real terms.

I see that it is for the banks own deposits with the reserve bank, essentially the RBNZ is paying the banks to borrow money from them
When did the fundamentals of finance get turned on its head?! and risk get priced at zero??

A move like this would penalize savers, encourage debtors to borrow even more and push asset prices even higher...
creating even more distortions and unproductive asset bubbles!

I guess balance sheets would look great because assets are increasing in value, but the systemic risk would also increase with an ever increasing debt to income ratio

What people learn about money and 'saving' is simply bad advice, In a world swamped with fiat currency debt
...and of course the education system rarely teaches anything about how to manage debt effectively

Incorrect, deposit rates will go to zero, and maybe negative. You won't get interest, you'll get a monthly fee for holding your cash. Its already happened overseas.
https://www.jarden.co.nz/news-and-insights/negative-interest-rates/

sure, that aligns with my first comment, but the actual negative interest rate applies only to loans between the banks and reserve bank....

If interest rates go negative, one has to pay charges to the Banks to keep their savings in them.
As for borrowers, no interest on loans, and if the loan is repaid the Banks will consider it as a gain.
May be they will reward prompt repayment with a bonus.
Money will lose its place as a storage of value. Only assets will have some semblance of value and savings for the future.
Shares will go down initially, but when people realise there is no other game, it will go up.
Gold, Silver and Precious Gems will make a huge come back. So will Arms and weapons.
Net effect : Rich will get Richer, as usually happens in all situations.