VIEW: BNZ Join The Negative OCR Club

BNZ are "somewhat belatedly joining the throng who believe the Reserve Bank of New Zealand will take its cash rate negative in 2021. We are doing so because the RBNZ has, for all intents and purposes, said it will. We said in our MPS review there was a 50/50 chance we'd do this, we are now over the line. We are not absolutely convinced as to when and by how much but, for now, have opted for a 50 basis point cut in the cash rate at the April Monetary Policy Review, taking the rate from its current 0.25% to -0.25%. We are pencilling in another 25 point cut at the August Monetary Policy Statement. The rate cuts will be accompanied by a funding for lending programme, in a bid to optimise the impact on lending rates of the negative cash rate. It would appear likely that to make this work the RBNZ would have to operate a tiering system whereby some portion of banks' cash balances are remunerated at a higher rate (less negative) than the OCR. Effectively this would mean the RBNZ would be rewarding banks who lend more. In this way the negative cash rate/funding for lending programme will dominate (for a while at least) the Large Scale Asset Programme as the primary source of additional monetary stimulus. However, as the RBNZ is now "allowed" to hold up to 60% of Government bonds on issue, the opportunity to increase the LSAP programme above the $100 billion currently touted will exist. Nonetheless, given current expectations for government bond issuance, this would more likely be a 2022 option than 2021. Note that it is currently likely the LSAP programme will be tapering at the time interest rates go negative."