Economists take Reserve Bank's hint, predicting OCR will drop below zero in 2021

Reserve Bank Governor Adrian Orr has told New Zealand's banks to be ready for a negative official cash rate by December. Photo / Mark Mitchell

A bid to cushion the economy through the impact of Covid-19 is likely to see the Reserve Bank cut its benchmark cash rate below zero, bank economists are now predicting.

On Tuesday ASB and ANZ joined Westpac in predicting that the official cash rate would be dropped below zero early in 2021. Westpac was the first to formally predict a negative OCR.

Economists at BNZ said on Tuesday that they were currently reviewing the bank's prediction, hinting that it was likely to follow a similar path in predicting a negative OCR.

"It now looks highly likely that they will go negative," BNZ head of research Stephen Toplis told the Herald.

The move follows statements from the Reserve Bank last week expressing a preference for a negative cash rate, along with a new "funding for lending programme" which would lend money directly to the banks in order to ensure that a lower benchmark rate would be passed on to customers.

ASB economist Mark Smith said the bank had been warning for some time that the current OCR was unlikely to be enough to boost the economy given the hit posed by Covid-19.

Smith said the bank was growing in its conviction that the Reserve Bank's own forecasts would prove to be too optimistic "even if the recent community outbreak of Covid-19 in NZ has a modest and short-lived impact".

Earlier this year the Reserve Bank slashed the OCR by 75 basis points to 0.25 per cent, and promised it would stay there for at least 12 months.

It also warned banks to have their systems operationally ready for a negative OCR by December this year.

ASB has predicted that in April 2021 the Reserve Bank would slash the OCR by another 75 points to 0.5 per cent.

ANZ meanwhile predicted April would see a 50 basis point cut to -0.25 per cent and it was possible that a further 50 basis points of cuts could follow.

"The RBNZ has ruled out changing the OCR before March 2021, but expressed a preference for a package of a lower OCR and a bank 'funding for lending' programme, should they conclude that further stimulus is required at that point," ANZ chief economist Sharon Zollner said in a note on Tuesday.

"We think they will."