Banks predict OCR to go below zero

Economists expect further decreases in retail interest rates and for the official cash rate (OCR) to be cut below zero in early 2021.

Major banks ASB and ANZ predict the Reserve Bank will cut the OCR, already at a record low of 0.25 per cent, below zero early next year.

Westpac has voiced a similar opinion for a number of months and BNZ says its forecast is under review, reports the New Zealand Herald.

Adrian Orr, pictured, Reserve Bank governor, has spoken of the prospects of a negative OCR and says it will likely be used in conjunction with a “funding for lending programme” that would directly fund banks at close to the OCR, to try to ensure lower interest rates reached customers.

The Reserve Bank has warned banks to be ready for negative interest rates before the end of the year, reports the New Zealand Herald.

ASB says it expects the central bank to slash the OCR by 75 points in April 2021, with it not climbing back above zero until 2024.

Mark Smith, ASB senior economist, says such a move carries risks and it is “unclear how easy it will be for an economy to extricate itself from a negative policy interest rate environment”.

Bonds scheme

The Reserve Bank is also expanding its purchasing of government and local government bonds up to $100 billion and has extended the timeline for a year to June 2022 as it tries to put further downward pressure on interest rates.

In its decision on August 12, the Reserve Bank said the relaxation of social restrictions in recent months had helped a recovery in economic activity.

However, that improvement is now under threat following Auckland being put at alert level three and the rest of the country at level two following a fresh outbreak of Covid-19.