Economist says its results overseas have been "decidedly mixed"
The Reserve Bank’s Quantitative Easing (QE) programme is looking effective so far, according to ASB chief economist Nick Tuffley – however, the possibility of a negative OCR has not been ruled out.
Tuffley says the COVID-19 crisis has driven a “substantial negative shock” to the New Zealand economy greater than that of the 2008 GFC. He noted that the OCR was cut by almost 600pbs at that time, while we entered the COVID-19 pandemic with the OCR at 1%, therefore reducing the leeway for cuts substantially.
“The RBNZ had the choice of adopting a negative OCR or using its wider tool kit,” Tuffley said in his latest economic note.
“It has chosen the latter. QE, forward guidance, and monetary policy implementation actions by the RBNZ and global central banks have been effective in helping to calm markets, lowering yields, narrowing spreads and have delivered lower retail deposit and mortgage interest rates.”
Currently, ASB is forecasting a 6% decline in New Zealand’s GDP over 2020 – twice the fall experienced during the GFC. It says the Reserve Bank’s QE measures have worked well so far, but the “true test” will be how long they can maintain their impact. When considering the possibility of a negative OCR, Tuffley says the experience of countries overseas has been “decidedly mixed.”
“Exiting out of a negative policy interest rate environment is easier said than done, with neither the Bank of Japan nor the European Central Bank able to move rates back into positive territory as yet,” he commented.
“Two of the best global central banks in our view – the US Federal Reserve and the Reserve Bank of Australia – have ruled out negative policy interest rates for the time being.”
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“There is a considerable body of evidence suggesting that the effectiveness of interest rate settings tends to diminish for lower and negative interest rates,” he added.
“Negative interest rates could interfere with the functioning for banking systems reliant on deposit funding and impair the ability of some banks to supply credit, the opposite of what monetary easing would aim to do. Banks may actually increase their mortgage interest rates in order to recoup the cost of holding reserves at negative interest rates – however, even here, the evidence is inconclusive.”
