Our central bank might have delayed any potential move into negative interest rates, but only a hardened gambler would bet against our Official Cash Rate having a minus sign in front of it by early next year

Our central bank might have delayed any potential move into negative interest rates, but only a hardened gambler would bet against our Official Cash Rate having a minus sign in front of it by early next year

It now starts to feel like the possibility of negative interest rates has been wafted in front of Kiwis forever.

Like a threat to small children who won't eat their dinner, there it lurks.

"If you don't eat your greens, we may be forced to give you negative interest rates."

I suggested last year that we may see a negative Official Cash Rate THIS year.

Well, we won't because after shredding the OCR in March down to just 0.25%, the RBNZ promised to hold the rate at that level for 12 months. And that was re-affirmed more recently.

But, remember, the main reason the central bank didn't take a plunge into the negatives was because the systems of some banks couldn't physically handle interest rates with a minus in front of them.

So, out came the big bazooka and on with the money printing it was.

In the meantime though our banks have been told to get systems ready to the point that they could handle negative interest rates by the end of this year.

What that tells you is the RBNZ has put negative rates on hold - but it's never put them away.

And indeed, I got a firmer impression than before reading the latest Official Cash Rate Review this week that as soon as it is able (March next year) the RBNZ will take the OCR boldly where it has never been taken before and into minus territory.

Economists in the language of economists described this week's OCR statement as "dovish". These days central bank governors only seem to occupy either "dovish" or "hawkish" territory.

Actually, I would describe the latest statement from RBNZ Governor Adrian Orr as very downbeat. More so than I expected, given that we got our economy up and running at near-normal levels much earlier than anticipated - and certainly much earlier than the RBNZ was factoring in.

No escape

I think as the IMF's latest outlook showed though there's no escaping the harsh consequences of the pandemic. Nor is there any escaping the fact that the economic consequences will continue as long as the pandemic rages.

And rage it does. I think it's worth noting that at time of writing the United States had just had its worst day yet in terms of new cases (39,100) - and this is a country that has had lockdowns in place in various regions for months, with consequent massive economic damage.

It's very hard to see things bucking up too much globally till the US gets on firmer footing. That looks a distant prospect at the moment.

So, what does it mean for us?

Well, it means the RBNZ is still very much expecting the immediate future to be rough. 

The OCR statement on Wednesday appeared to firmly lay the groundwork and expectation for the RBNZ to increase at its next review in August the quantum of quantitative easing (QE) from the $60 billion in place currently (bearing in mind it's already used up $17 billion of that in bond purchases to date). A new set limit of say $90 billion seems very much on the cards.

And then negative interest rates next year? Well, I think unless things go very much better for the economy than appears likely at the moment, we will almost certainly see a negative OCR. I should stress, as the RBNZ is quick to do, that this doesn't mean we will see banks offering term deposits with a minus in front of them. No, we won't have negative 'retail' interest rates. Savings rates offered by the banks will still be positive, but by golly not by much. Try living on the interest income.

But saving more?

Yet the very lack of interest income could potentially make people save MORE. This is certainly what some economists think. In order to meet savings goals and with little interest income to help, people could stash MORE money.

That becomes a problem for the economy of course, if that happens. Because it means spending falls off a cliff and the wheels of the economy don't turn.

The issue of whether people spend or not is already right in front of us.

We know from previously released data that card spending went right down and savings went right up during the lock down. At least some of the latter would be people stashing wage subsidy money.

Now that we are at Level 1 there's definitely been some relief spending going on. But the key will be to what extent normal or near normal flows of spending continue. 

As more people lose jobs and more people fear losing jobs, there has to be the feeling that spending will start to dry up again. Which is bad news for the economy since it then means businesses aren't making money, they lay off staff, who then don't spend money...and so on.

All of which makes it more and more imperative that we keep our virus numbers here as low as possible and keep the economy operating as normally as possible.

I honestly think too many of us, basking in the false glow of apparently no Covid cases here, really thought the 'war' was won. Look with what we achieved in lockdown we've done real well in battle. The war is far from over unfortunately.

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15 Comments

The end result:
Austria's 100-Year Bond Sale Is 8x Oversubscribed
Whopper NZ Government bond of $7 billion issued after $14 billion worth of bids, annual Government Bond Programme size increased by $4 billion to $29 billion

Meanwhile, as the duration of bonds keeps getting longer, so does the demand due to the extremely high convexity of ultra-low coupon issues: the prices of bonds with very low coupons rise more sharply when yields fall than they decline when yields rise, meaning the price outperforms when interest rates drop.

Which begs the question: when will central banks do away with any pretense that these bonds will ever be repaid, and who will be the first European nation to issue perpetual bonds - known by some as "equity" - which will then be promptly monetized by central banks who, after having nationalized the private bond market, will take over sovereign states next.

It's just a matter of time before the banks are gone and the government takes over: Central banks and payments in the digital era

Casino economics is a path paved with danger.

" expectation for the RBNZ to increase at its next review in August the quantum of quantitative easing (QE) from the $60 billion in place currently... to a new set limit of say $90 billion seems very much on the cards."

Why stop at $90 billion? Why not make it $100 billion or $150 billion or a trillion?
It makes no difference, after all? It's all fantasy money, that we are told will never have to be repaid, so why the limit in a World where everyone else is doing it, and welcome to the New Normal.

Indeed. What were once bank assets (reserves) become liabilities if the RBNZ's policy interest rate turns negative.

Didn't Japan only ever go into NIR territory only for a short period? Regardless, I think the Japanese know how to do this QE stuff and shuffle the stimulus into the 'real economy' far better than NZ is capable of. Was in Osaka on business and they were building a new subway line (as part of an already outrageously good network) and went back 18 months later and it was finished!

As for little to no interest rates on savings, seems like the banks can move into the reverse mortgage business to provide income for retirees. Win win.

Most people underestimate economic/policy inertia.
I remember calls a few years ago that if, IF the OCR was cut under 3% it would certainly, without doubt be the bottom and that rates could only increase from there. Similar talk when the OCR dropped below 2%, now below 1%… and most don't seem to learn the lesson, yes it can keep going much further and longer than we anticipate.
Same applies to the QE bw is referring to above, which probably will indeed exceed $150 billion (which of course is unimaginable to most right now)
Same applies to the endless calls over decades that house prices surely, under no circumstances can keep rising in value…
The smart money is on the continuation of a current trend and the longer this trend has been in place for, the harder it will be to break

The most dangerous thing any society can do is trivialise that value of Debt.
In the old days, those who assumed debt that wasn’t repaid were taken out onto the village green and disembowel before the other villagers. That ensured that those who borrowed in the future were both careful from whom they borrowed and ensured they repaid their debt. Debt had tangible value.
We’ve moved on, of course. But the principle still applies.
Who of us will work for debt (wages, paid as money = debt that can be exchanged for other goods) if the certainty of that debt has questionable value (Who will take it? What will it be exchangeable for? Anything?)
We are on the cusp of making debt worthless (no cost to borrow and no need to repay) and if that happens our monetary and social systems will collapse.
Then, just like Shrodinger’s Cat, everything will have infinite and no value at the same time and none of us will want to open the lid of the box to find out which it is.

BW, all valid points! You do omit a crucial measure in pretty much all your posts, time… when will the system collapse? Tomorrow? This year? Next year? Next decade? Next century?

The smart money is on the continuation of a current trend and the longer this trend has been in place for, the harder it will be to break

Where did you gain this wisdom? It sounds like one big cliche without any validation.

Through 25 years of personal investment experience

Good points.
I think a key point here is that central banks and governments will do whatever they can to prevent housing markets from collapsing.
Housing market crashes are devastating economically and socially. And it's not good politically either.

Indeed Ftitz, so predicting house prices to crash is basically betting against the government and the RB, a brave bet indeed.

David, good article. Note though that the RBNZ said 12 months, but they aren't formally bound to that.
My view is that they will go negative once the banks are set up to enable that. I have no idea when that might be. But if they did that by say October, then I'd put money on the OCR being negative by year's end.

In real terms we have been negative for quite awhile. Great for government spending. Make no mistake about it we go further into negative territory. Mr. Orr has been signalling at each meeting. Hedge accordingly.

A few points to start with. When it comes to the world economy, there are no subject matter experts. If there was, they would all be all billionaires. The system is a colossal combination of actions and reactions far too complex to predict. These self appointed experts spend all day studying the past, because what happened in most cases was not as expected. So we really have no idea what will happen going forward, but we do know that policy makers are attempting to intervene rightly or wrongly. The Great Depression has been the subject of much analysis and study, with the ultimate aim of not letting it reoccur. We might all agree that the world has a debt problem. Someone stated "In the old days, those who assumed debt that wasn’t repaid were taken out onto the village green and disembowel before the other villagers." I don't know about that, but in the past there have been debt jubilees that cleared debt from public records across a wide sector or a nation. So in the end you have to decide whether the policy makers will choice to disembowel with a COVID19 depression, or perform a debt jubilee through money printing and super low interest rates.