Why would the Reserve Bank introduce negative interest rates?
Negative rates are best thought of as just an extremely low interest rate. They are intended to help boost the economy, by reducing the cost of borrowing.
Lower interest rates would also probably help lower the New Zealand dollar, giving our exporters a helping hand.
What’s happened when other countries have introduced negative interest rates?
Large parts of Europe have had negative interest rates for several years. But so far only very large deposits, typically from businesses and wealthy customers, have been subject to negative retail interest rates.
Would a negative OCR boost the economy?
Economists and financial experts are divided on the effectiveness of negative rates.
If deposit rates were to turn negative then many depositors would be likely to look elsewhere for better returns; investing in assets like stocks, bonds, property, art or digital currencies, or just generally saving less.
Most of these activities would boost the economy – though not all. And there is also some evidence that people save more when interest rates are exceptionally low, since there is no accumulating interest to help them reach their savings goals.
Safety deposit boxes might also prove popular, which do not stimulate the economy.
Firms may be more likely to invest if they can borrow at a lower interest rate, but if banks’ profit margins are squeezed, banks may be less enthusiastic to lend.
In the long run, the likely outcome of encouraging borrowing and discouraging saving is higher debt levels and inflated asset prices.
That could cause problems down the track, but these critiques apply to very low interest rates generally, not just negative interest rates.
How soon could we have negative rates in New Zealand?
The Reserve Bank cut the Official Cash Rate to a record low of 0.25% in March; and said it would keep it there for 12 months.
But the RBNZ has signalled that negative interest rates could be an option in the future.
What is ANZ doing to prepare for negative rates in New Zealand?
New Zealand’s banks have been asked to make sure our computer systems and processes are ready to cope with zero or negative interest rates by the end of 2020.
What is the outlook for interest rates in New Zealand?
Negative retail deposit rates are very unlikely. But they are not impossible. We are in unprecedented times and the implementation of negative interest rates will depend on how the New Zealand economy performs through the rest of 2020.
Even if interest rates do not turn negative they are likely to remain very low for a long time.