Reserve Bank of New Zealand says ‘planning’ for negative cash rate coronavirus scenario

The Reserve Bank of New Zealand has indicated it is in discussions with financial institutions about negative cash rates.

New Zealand’s central bank noted the sharp contraction of the economy due to the virus is expected to reduce inflation and employment for several years. Picture: Bloomberg

The New Zealand divisions of Australia’s major banks are on standby for potential negative interest rates, following the country’s central bank flagging further monetary easing measures.

The Reserve Bank of New Zealand has indicated it is in discussions with financial institutions about being prepared for the country’s central bank to potentially impose a negative cash rate, if the coronavirus pandemic continues to drag down economic recovery.

In a note issued on Wednesday, the RBNZ reaffirmed the official cash rate will hold until at least early 2021, noting the current banking environment is not “operationally ready” for another cash rate cut.

“The current goal of monetary policy tools is to reduce borrowing rates for New Zealanders, and further official cash rate reductions at this stage would not be effective in achieving that,” the RBNZ said.

Australia’s big four banks all have trans-Tasman operations, with a potential negative interest rate likely to place further pressure upon capital positions.

The RBNZ said its discussions with financial institutions are around the preparedness for a negative interest rate environment, if economic disruptions persist.

New Zealand’s monetary policy committee has also agreed to the expansion of the RBNZ’s government bond buying program from $NZ33bn to $NZ60bn. The country’s quantitative easing measure is known as the Large Scale Asset Purchase (LSAP) program.

“The expansion to the LSAP program aims to continue to reduce the cost of borrowing quickly and sharply,” the RBNZ said.

“This is preferable to delivering a smaller amount of stimulus now, only to risk later realising more should have been done.”

New Zealand’s central bank noted the sharp contraction of the economy due to the virus is expected to reduce inflation and employment for several years.

The RBNZ’s outlook of further economic intervention comes a week after the Reserve Bank of Australia retained its official cash rate at 0.25 per cent, signalling little prospect of economic change while the country grapples with the pandemic.

Financial incumbents have also been banned by the country’s central bank in paying dividends to shareholders, as a measure to ensure banks retain strong capital positions.

The country has also delayed the implementation of stricter capital requirements, while downturn continues.

Westpac New Zealand’s chief economist, Dominick Stephens, forecast in late April that the central bank will reduce the official cash rate to negative 0.5 per cent in November.

Mr Stephens said the move to a negative interest rate position might be flagged in its August monetary policy statement.

The Australian has contacted ANZ, Commonwealth Bank and NAB for comment regarding provisions for further interest rate cuts.