OCR reaction: Reserve Bank open to lower, negative rates

Economists say the Reserve Bank has left the door open to lower or negative rates, as it kept the official cash rate on hold.

Wednesday, May 13th 2020, 2:27PM

Jarrod Kerr, Kiwibank

The OCR will stay at 0.25% after the central bank outlined its latest Monetary Policy Statement.

The Reserve Bank said it was in ongoing "discussions" with trading banks about preparations for negative interest rates, and signalled lower rates could be on the way early next year.

Kiwibank chief economist Jarrod Kerr said the central bank "has left the door open to negative rates should they need it", but said the main message was the expansion of New Zealand's quantitative easing programme, which was increased to $60 billion.

Kerr said the Reserve Bank could cut the OCR again if the economy deteriorates further.

"If things don't pan out as we hope, or if we see another lockdown, or activity being subdued for much longer, they will go down that path."

Westpac chief economist Dominick Stephens said the Reserve Bank's decision to keep the OCR on hold was "exactly what we expected".

"They are open to a negative OCR but can't implement it now," Stephens said. "They gave forward guidance that they don't expect to change the OCR until early next year, but it wasn't an iron-clad promise."

NZIER's Christina Leung said the Reserve Bank has signalled its willingness to use unconventional policy to boost the economy.

"The central bank has now flagged that possibility [of negative rates], as well as introducing other unconventional monetary policy support measures," she said.

In the short term, the Reserve Bank expects mortgage rates to fall in line with wholesale costs.

"We expect to see retail interest rates decline further as lower wholesale borrowing costs are passed through to retail customers," the central bank said in its statement.

CoreLogic welcomed the Reserve Bank's comments, and suggested lower mortgage rates could be on the way.

"We’ve already seen some mortgage rate offers go below 3% and there are plenty of anecdotes about investors keen to continue buying property as they hunt for a better yield than money in the bank.

"More falls in mortgage rates can’t be ruled out either, given that the RBNZ today also signalled the possibility of further cuts to the OCR next year, and subtly suggested that the trading banks should be passing on any falls in financing costs to borrowers."

Tags: OCR OCR forecasts