Coronavirus: Negative cash rate in November, Westpac chief economist predicts

Tuesday, 28 April 2020

New Zealand's official cash rate could drop to -0.5 per cent later this year, Westpac says, as the country fights to recover from the impact of Covid-19.

Chief economist Dominick Stephens said a negative cash rate would be a natural step as part of the 'massive stimulus' being delivered to the economy from the Government and the Reserve Bank's quantitative easing.

He expects to see a 16 per cent drop in GDP in the June quarter, followed by a 13 per cent increase in September. Recovery in earnest would begin in 2021, he said. The economy would probably not return to its pre-Covid-19 size until 2022.

'Unemployment, business failures and falling house prices will start to have a second-round effect on the economy and keep things subdued into early 2021.'

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Unemployment would peak at 9.5 per cent, he predicted, and it could be years before it returned to below 5 per cent.

The Government would attempt more stimulus, Stephens, said, but there was only so much it could do before its debt projections became 'unacceptably high'. That would force the Reserve Bank to step in again. It would probably keep the cash rate on hold until November, when it would cut it to -0.5 per cent.

It would probably also double its quantitative easing programme to $60 billion.

Stephens said it would mean little for the average New Zealander. 'No household or business actually pays the official cash rate. So as far as ordinary people are concerned, it's an OCR reduction like any other.'

Retail rates would drop, he said, but not to negative territory.

A rate of -1 per cent was as low as the official cash rate could drop and still make a difference, he said, because of the margin that was applied to what banks paid in term deposits.

The Reserve Bank had pledged to keep the cash rate at 0.25 per cent for a year but Stephens said it would be forgiven for going back on that in order to cut further.

It would need to signal the move was likely and give banks time to adjust their systems for negative interest rates.

'It will have to say the level four lockdown was an extraordinary event.'

Meanwhile, ASB has predicted it will take a full three years to get the economy back to a pre-Covid-19 level of activity.

'We estimate economic activity will still only be around 80 per cent of normal in level three as the economy will be battling through the headwinds of damaged household incomes and business balance sheets, weak confidence, and a much larger debt burden.'