Comments from Reserve Bank governor Adrian Orr have economists predicting a negative official cash rate and predicting the lower benchmark rate will be passed on to customers. Photo / Mark Mitchell
Comments from Reserve Bank governor Adrian Orr have economists predicting a negative official cash rate and predicting the lower benchmark rate will be passed on to customers. Photo / Mark Mitchell
Retail interest rates could slide further, with economists predicting that not only will the official cash rate (OCR) be cut below zero, that most of the drop will be passed on to customers.
On Tuesdaytwo of New Zealand's four major banks, ASB and ANZ, predicted for the first time that the Reserve Bank will cut the OCR, already at a record low of 0.25 per cent, below zero in early 2021.
The banks joined Westpac, which has been predicting a negative OCR for several months. BNZ said yesterday that its forecast was under review and it was "highly likely" the OCR would be cut below zero although the timing was uncertain.
While regular bank customers do not borrow at the rate of the OCR, recent comments from the Reserve Bank have boosted expectations that any cuts will filter almost directly through onto mortgage and deposit rates, already at ultra low levels.
As official interest rates fall close to zero, they have tended to have less of an impact on retail interest rates, because banks need to raise funds from local depositors and international funding markets.
Expectations that the Reserve Bank would bypass credit markets by directly funding bank borrowing could change this.
Last week governor Adrian Orr expressed a preference for a negative OCR and suggested it would likely be used in conjunction with a "funding for lending programme" which would directly fund New Zealand's banks at close to the OCR, to try to ensure lower interest rates reached customers.
ANZ chief economist Sharon Zollner said that by cutting out the uncertainty of bank funding it was likely that a funding for lending programme would see a lower OCR passed on at almost a one to one ratio to customers.
"You'd expect lending rates to be freed up to move more in lockstep with the OCR," Zollner said.
Asked if this meant borrowers could see mortgage rates below 2 per cent, Zollner said they might.
"I can't make any promises on that front, but you would expect a 50 basis point cut to the OCR would flow through [to customers] pretty quickly."
ANZ chief economist Sharon Zollner. Photo / Dean Purcell
The outlook would be negative for savers, although typically retail customers do not face negative interest rates.
"Deposit rates have a petty firm floor [at zero]," Zollner said.
"It's very difficult from a PR point of view to charge people for putting their savings in the bank."
Earlier Reserve Bank research warned that negative interest rates lose effectiveness, particularly for deposits, when the cost of storing cash safely is less than the cost of leaving it in the bank.
ASB had previously warned that the current interest rates would not likely be enough to bolster the economy from the impacts of Covid-19.
It now predicts the central bank will slash the OCR by 75 points in April, with the OCR not moving above zero until 2024.
ASB senior economist Mark Smith wrote on Tuesday that there were risks of a negative OCR, as well as other central bank tools. It was "unclear how easy it will be for an economy to extricate itself from a negative policy interest rate environment," Smith said.
Predictions of a negative OCR firmed just a day after the Government confirmed that the Reserve Bank's mortgage deferral scheme - which allows borrowers to halt repayments without their bank regarding the loan as being in default - for another six months, until March 2021.
BNZ head of research Stephen Toplis said if the Reserve Bank was lending directly to banks it was very likely to have a material impact on interest rates, but if the aim was to boost wider economic activity, it was not clear it would be successful.
"It will be very effective in lowering interest rates. The question I would ask is 'will lowering interest rates be very effective in stimulating the economy?", Toplis said, amid signs that the housing market has been defying predictions of a slump.
"Is it stimulating the economy, or is it providing low costs for speculators?"