Negative interest rates almost inevitable, says economist

by Ksenia Stepanova21 Sep 2020

Negative rates are almost certainly on the way, and the Reserve Bank of New Zealand is likely to leave its current policy settings “untouched” according to Kiwibank chief economist Jarred Kerr - however, he says recovery is also likely to be swift.

Last week, New Zealand entered its first recession in eleven years. Kerr noted that the economy contracted by a “gigantic” 12.2% in the June quarter - the next largest drop being back in the early 1990s, with a “paltry” -2.4% fall in comparison. He says wholesale interest rates are going to keep falling, and negative rates are almost inevitable at this stage.

“The nationwide lockdown meant all but essential activity was hit hard,” Kerr commented.

“Industries reliant on foreign visitors and face-to-face contact were particularly exposed.”

Read more: New Zealand’s economy is doing better than expected - ASB

“Never have we recorded such declines, but never are we likely to bounce back so quickly, either. We are picking a decent rebound in the third quarter of around 10% as alert levels were lowered.”

“The reason interest rates are falling, and will likely go negative (for wholesale rates), is because the RBNZ believes there is not enough stimulus in the economy to return us to full employment,” he explained.

“If we had done too much, interest rates would be rising. The fact we haven’t done enough, means interest rates will keep falling. It’s that simple.”

Kerr says the focus should now be on supporting small businesses and helping them adapt. He noted that the government’s COVID Response and Recovery Fund still has $14 billion left to allocate, a significant chunk of which should go towards easing the pressure on struggling SMEs.

“Policy measures should now focus on enabling businesses to adapt,” Kerr said.

“The wage subsidies were the best policy response during “triage”. We’re now in a rehabilitation phase. Policies aimed at SME businesses are important, and SME grants may be a cost-effective way to support affected businesses and encourage new businesses.”

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