Community transmission could force negative OCR: Kiwibank

Community transmission of Covid-19 could force the Reserve Bank to slash the Official Cash Rate to negative territory, according to economists at Kiwibank.

Monday, July 13th 2020, 5:35PM

In their latest weekly report, the economists say a "shock" outbreak, and subsequent return to lockdown, could cause "the RBNZ to embark on a path below zero".

According to the team, the worst-case scenario would mean a 75 basis point cut to -0.50% for the central bank rate.

New Zealand continues to win the battle against Covid-19, however, and economists say the Reserve Bank will stick to its quantitative easing programme, unless conditions drastically change.

After months of growing enthusiasm for negative rates across the market, economists now believe they are an outside bet.

The Kiwibank team, lead by Jarrod Kerr, (pictured) expect wholesale swap rates to hold steady next year, near 0.25% "as the RBNZ’s on-hold guidance likely extends into 2022".

QE, through the RBNZ's Large Scale Asset Purchase programme, is viewed as the preferred method to stimulate the economy and keep interest rates down.

Kiwibank expects the Reserve Bank to expand its LSAP programme into 2022 in August, and boost the total amount towards $100 billion. "The program is likely to hit $120bn into 2023, the economists said.

The economists believe the next best policy tool wold be a term funding facility for lenders, as seen in Australia.

"Cheap term funding will lower all bank rates immediately," the bank said.

Kiwibank also noted a strong resurgence in the housing market in June.

"The anecdotes of recent weeks appear to be true, with both sales and house prices growth jumping in June. Large swathes of the economy have resumed business as usual, which seems to have been mirrored by the housing market."

The bank suggests a "first home buyer binge", encouraged by the end of LVR restrictions, is behind the strong June data.

Tags: Kiwibank