Economists predict that the Reserve Bank of New Zealand (RBNZ) will hold the official cash rate (OCR) this month. However, the central bank might also discuss the growing chance of a negative OCR as the COVID-19 crisis continues to impact the economy.
The latest TMM Online Monetary Policy Review preview survey revealed that all respondents expect the OCR to remain at its current level, with an 80% to 100% probability.
Christina Leung, a principal economist and head of membership services at the New Zealand Institute of Economic Research (NZIER), expects the RBNZ's statement to include a “more dovish assessment of the economy,” with “an indication about a negative OCR.”
Meanwhile, Kiwibank economist Mary Jo Vergara believes that the central bank will “relax their language around the path of the OCR.”
“In recent months, a negative OCR has gone from possible to probable. The market is certainly pricing it in, as early as February even,” Vergara said, as reported by Landlords.co.nz.
Read more: ASB reveals the negative side of negative OCR
Many economists believe that cutting the OCR next year is inevitable to keep the economy moving. However, ASB economists have warned that a negative OCR comes with many drawbacks.
“The major concern is that negative interest rates can interfere with the functioning of banking systems reliant on deposit funding and impair the ability of some banks to supply credit and general financial stability – the opposite of what monetary easing aims to do,” ASB economists said, as reported by Stuff.co.nz.
They also expect negative interest rates to impact the financial system as “retail deposit rates tend to be effectively bounded at zero, whereas yields on interest rate swaps could fall below zero.”
“The presence of zero interest rate floor clauses in some loan documentation agreements can potentially limit the effectiveness of a negative OCR and could create some mismatches in interest rate swaps,” they said.