Low interest rate save or spend issue
New Zealand has ‘‘painted itself into a corner’’ with low interest rates and looks set to carry on painting, ANZ chief economist Sharon Zollner says.
While the Reserve Bank has said it will keep the official cash rate on hold at 0.25 per cent at least until March, banks have been asked to report by December 1 on how ready their systems are for a negative cash rate.
That could see home loan rates drop below 2 per cent, economists have suggested.
But Zollner said the central bank could be creating a problem difficult to unwind. Very low interest rates worsened wealth inequality, she said, suppressed the pricing of risk and influenced people’s financial decisions in a way that could be unhelpful.
‘‘If you’re worried about losing your job any financial adviser would tell you to save more. Cutting interest rates when times are bad is designed to make people save less and borrow more. That might be appropriate for some but not all,’’ she said.
It could set up financial stability issues, she said, if people were encouraged to borrow and then had trouble servicing that debt.
‘‘We’ve had more than a decade of very low rates and the general expectation is not only are rates going to stay low, they might go lower ... people borrow up to their capacity on the assumption rates are lower for longer and it becomes impossible to raise rates. We’ve painted ourselves into a corner and now we’re painting more.’’
A survey of economists by comparison site Finder found two of 16 expected the official cash rate to be cut by September. A third expected it to drop below zero within a year.
Oliver Hartwich from the New Zealand Initiative, the lone expert predicting a rate cut in June, said a negative OCR might happen as early as this month.
‘‘The RBNZ has signalled it is prepared to take the OCR lower if needed – even into negative territory – so we can expect this to happen. I would not be surprised if they made that move at their next meeting,’’ he said.
But Kiwibank economist Jarrod Kerr said a negative cash rate would be fraught with unnecessary risks.
‘‘The RBNZ should opt to expand the Large Scale Asset Purchases (LSAP) programme, or provide term lending to banks, as a more effective way of lowering retail deposit and lending rates.’’
Zollner expected the official cash rate to remain on hold until the end of 2022.
Economist Tony Alexander said he did not expect the cash rate to go negative. ‘‘If they did the economic impact would be very limited as banks might have to tighten their lending criteria in response to reduced margins as they need people to keep funds in term deposits.‘‘