What do negative interest rates mean?

Have you been watching the news and listening to comments from the Reserve Bank and wondering what it all means?

We invited Matt Sturmer a Senior Analyst Fixed Interest in Forsyth Barr’s research team to help explain what it might mean.

The prospect of negative interest rates is once again in the spotlight after the Reserve Bank of New Zealand (RBNZ) stated recently that lowering the Official Cash Rate (OCR) into negative territory was still an option (albeit not for a while yet).

Central Banks around the world are responding to the unprecedented economic conditions caused by COVID-19. One of their key policy tools is to lower their benchmark interest rates, the OCR in New Zealand’s case, which filter through to lower retail borrowing costs for businesses and households.

The RBNZ has stated on numerous occasions that the OCR will remain at the current 0.25% at least until March 2021. This is because the banks are not yet operationally able to operate with negative interest rates. Whether the OCR heads into negative territory will depend on the economic conditions at the beginning of 2021.

The theory is that if the OCR is negative, banks won’t ‘park’ so much cash with the central bank as it will actually cost them to do so and will instead lend it out, keeping credit flowing through the economy.

Negative interest rates are not new with The Bank of Japan (BoJ), The European Central Bank (ECB), Swiss National Bank and Sweden’s Riksbank Bank all implementing negative interest rates in recent years. However, negative retail interest rates for both depositors and borrowers are very uncommon in countries that have negative interest rates.

The success of negative interest rates is mixed with some economists now believing that having negative interest rates had a negative effect on restarting an economy. Depositors did not spend the same given any savings withdrawn was capital and not interest earned.  Also borrowers can only take on a limited amount of debt before credit metrics become an issue.

 

You might like to discuss the views in this article with your Financial Adviser. 

If you are a member of the Summer KiwiSaver scheme you can access a range of research from Forsyth Barr's experienced team of research analysts to help you make sense of what is happening in the world, including the latest special report which also covers the concept of negative interest rates.


 

 

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