Hope raised that interest rates won't go negative next year

Friday, 6 November 2020

Unemployment was tipped to be about 7 per cent by now but it is only 5.3 per cent, one of several surprisingly positive economic indicators.

Better than expected economic information has prompted BNZ to suggest that interest rates won’t necessarily have to go negative next year.

BNZ head of research Stephen Toplis said that previously it had been almost universally accepted that the Reserve Bank would have to cut the official cash rate (OCR), presently at 0.25 per cent, to historic new lows below zero next year.

But a host of economic data had proved more resilient than forecast, and the central bank’s new plan to make business lending cheaper might also help interest rates stay above ground.

'’When the Reserve Bank first intimated that interest rates would need to go negative, they were forecasting that house prices would fall 9 per cent and that the unemployment rate would rise to a significant level,’’ Toplis said.

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‘’Now they’re operating in an environment where it looks like they might have the magnitude in the house price movement correct but the sign wrong, and the unemployment rate does not appear to as high as anticipated and general economic momentum is better.’’

If that was sustained, and the Reserve Bank’s ‘’funding for lending’' programme benefited the economy, it was possible the OCR might not have to go negative, he said.

The closed border is expected to hit horticultural and tourism businesses hard this summer.

The problem was that there was a lot of time between now and February, when the central bank was expected to flag that decision.

A host of things could change the game plan, including vaccines, border openings and new testing regimes, Toplis said.

The Reserve Bank is due to announce details on the ‘'funding for lending’’ programme next week.

The programme, which gives banks cheaper loans and incentivises them to pass it on to businesses, is a first for New Zealand, and banks agree that they do not know how much it will aid the economy.

ANZ is forecasting a 50 basis point cut in April, which would push the OCR down to negative 0.25 per cent.

BNZ also still has a 50 point cut in April pencilled in, with another cut possible later in the year. “Minus point five [per cent] is probably as low as rates can feasibly go,’' Toplis said.

‘’I would argue that if you want to improve business confidence, you’ve got to get rid of Covid. Lowering interest rates only helps at the margin because that’s not the issue.’’

Westpac is also expecting the OCR to dip below zero, but spread the cuts gradually through the year.

ANZ chief economist Sharon Zollner, said the odds of negative interest rates had definitely fallen, and the fact New Zealand was largely able to operate Covid-free was ‘’worth its weight in gold’’.

However, the closed border was a significant issue, particularly for seasonal businesses over the summer.

‘’Many firms are sitting on reasonable piles of cash because they had a good season last year, then they had the wage subsidy, then they had Kiwis stuck in New Zealand through the winter when they normally would have been overseas,’’ Zollner said.

‘’But from now on it’s going to turn the other way for a large number of companies in terms of their cash flow.

‘’There is still a very real prospect of this sharp recovery running out of steam a bit as reality bites. This real income shock that New Zealand is facing hasn’t been felt yet, so it's just too soon to say we're out of the woods,'’ she said.

‘’The Reserve Bank will certainly want to leave all its options open.’’

Westpac chief economist Dominick Stephens said below-zero interest rates and the funding for lending programme would combine to help slow demand for central bank bonds.

The brakes would then go on the rampant housing market by reintroducing loan to value ratio limits for property investors, he said.

The Reserve Bank will make its next monetary policy statement on November 11.