Economists expect OCR to fall below zero next year

by Mark Rosanes20 Aug 2020

Economists at the country’s biggest banks have predicted that the Reserve Bank of New Zealand (RBNZ) will slash the official cash rate (OCR) to below zero in April next year.

Their prediction comes as the RBNZ decided last week to keep the rate at its current historic low of 0.25%, while promising not to make further cuts until March 2020.

ANZ chief economist Sharon Zollner forecasted the OCR to fall to by 50 basis points to -0.25% in April 2021 and pegged the lower limit at -0.75%. This would suggest that retail borrowing rates could drop another 100 basis points, pushing home loan rates to below 2%. 

Read more: Reserve Bank holds OCR at current level

Meanwhile,  Auckland Savings Bank (ASB) economists have “pencilled in” a “large one-off OCR cut” of 75 basis points but said the low point at which the rate would still be affected could drop to -1%.

The RBNZ’s most recent monetary policy statement has shown it is laying more groundwork to support such a move. The bank said it might be keen on helping to fund loans to allow lenders to pass on the benefit of a negative OCR to retail borrowers. 

Slashing the rate below zero would help borrowers, including homeowners, who could see mortgage rates slide by up to about 1%, but at the expense of savers who have already seen interest rates on term deposits and other cash savings adversely impacted.

Deep reservations

Zollner admitted that ANZ economists were “not fans” of negative interest rates and had “deep reservations” about the financial and social ramifications of having extremely low interest rates for an extended period.

She also pointed out the “difficulty of exiting unconventional monetary policy,” which has been observed in other countries in the past decade.

However, Zollner said that they were also not fans of deep recessions.

“The Reserve Bank has clear inflation and employment mandates, and unless instructed otherwise, will feel duty-bound to do what it can to deliver on those mandates over the medium term,” she said.

“Long-term risks of unconventional policy are so blurry that of course the natural tendency is to focus on the nearer-term, more easily identifiable and quantifiable risks.”

Meanwhile, ASB economists said that the current 0.25% OCR was not enough to provide support to the economy. They anticipate a -0.5% drop in April and see the rate staying at that level until late 2022 as the RBNZ “errs on the side of caution to make sure the recovery is well established before slowly raising the OCR.”

“The extent the OCR could fall and how long it would remain there would depend on the economic outlook, the effectiveness of other policy options (particularly the LSAP programme), and the ability of banks to continue to attract funding from depositors,” ASB’s economists said. “We do not expect the OCR to move above 0% until 2024.”

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