Negative OCR would be a mistake: Kiwibank

In their latest report, the Kiwibank team, led by Jarrod Kerr, warn a negative central bank rate is not necessary. 

"Current economic conditions don’t justify it, the supply of credit is not an issue, and people are likely to save harder with ~0% deposit rates," the economists say. "Going negative also depletes the RBNZ’s armoury."

The team suggests the hit from the second level three lockdown in Auckland "feels materially different", with businesses better prepared and more operating.

Nonetheless, they believe it is a "possibility" that the OCR will go negative, as predicted by ANZ, BNZ and ASB last week. Wholesale markets have priced in 40 basis points worth of cuts from today's 0.25% rate.

"Packaging a negative OCR with a funding for lending programme makes going negative a viable option," the team added. "The market is already pricing in ~40 [basis points] of cuts by April 2021. But a lot can change in eight months."

The analysts believe the Reserve Bank's prospective funding for lending programme – providing direct funding to retail banks – will be "sufficient" to push interest rates down and stimulate the economy. 

They argue the demand for credit is more of a concern than supply.

"The negative OCR accompanied with a highly effective funding for lending programme will create more supply of credit (loans). But the supply of credit is not the problem ... Businesses are simply unwilling to load on more debt in highly uncertain times. With the end of Covid unknown, it is understandably difficult for businesses and households to plan 9-12 months ahead," the economists added.

They believe the central bank should test out the direct lending programme before opting for negative rates. 

"We believe it would be a far better, and safer, approach to first introduce the bank funding facility, and then assess its success. If retail rates have not been lowered enough, the RBNZ may then consider taking the OCR negative. A two-step approach not only lowers rates, as desired, but also ensures the Reserve Bank’s armoury remains well stocked for when true danger arrives."