The OCR ‘floor’ likely somewhere between -0.25% and -0.75%, according to ASB Senior economist Mark Smith, and the Reserve Bank may consider taking other measures once the cash rate is cut to its limit.
The Reserve Bank has made two significant cuts to the OCR this year, and more are very likely on the way. Economists are now turning their attention towards the ‘end of the line’ for OCR cuts, and what that would mean for monetary policy – Westpac chief economist Dominick Stephens noted at the Financial Advice New Zealand conference in August that a negative OCR was certainly a possibility, but that even that had its limits.
Stephens set that limit at -0.50%, and ASB’s Smith thinks it has the potential to go as low as -0.75%. However, Smith says that the OCR ‘floor’ would depend substantially upon the policy settings of other central banks, and that any other forms of monetary easing should only be done once OCR cuts could no longer achieve their desired effect.
“Our preference would be for the OCR lever to be fully exercised before other measures are contemplated,” Smith said.
“There are a variety of other unconventional policy options available, but none are without cost. To provide the best bang for your policy buck, closer co-ordination will be needed.
“When standard expansionary monetary policy has become ineffective, authorities can resort to using unconventional forms of monetary policy (UP), of which there are several forms.”
These ‘unconventional’ forms include negative policy rates, the introduction of tiered lending, a longer-term commitment to a low OCR and direct intervention in interest rate markets, among others. However, Smith says the ‘lower bound’ for New Zealand’s OCR will likely vary over time and will depend on global conditions.
The OCR is at a record low 1.00% and from time to time has been below comparable policy interest rates in Australia, the US, UK and Canada,” Smith explained.
“We could not find any period over the last 20 years where the level of the OCR was below comparable policy interest rates in Denmark, Japan, Sweden and Switzerland. As such, the lull in the OCR is still likely to be above the lull in policy rates in these economies.”