Negative thinking

Banks prepare for interest rates starting with a minus sign A situation where a retail depositor is paying to put their money in the bank seems a long way away.

The potential for the official cash rate to go into negative territory has rekindled a Y2K moment for the banks, as they rush to get their systems ready. The Reserve Bank has asked trading banks to be ready to implement a negative OCR by December 1, meaning that in practice it would be possible to start from the beginning of next year.

In March, the Reserve Bank cut the OCR to a record low of 0.25 per cent and, unusually, said it would keep it there for 12 months.

Westpac chief economist Dominick Stephens said in a note on Friday that he initially forecast the OCR to be cut to negative by November but has since revised that to April after comments made following the recent monetary policy statement on May 13.

But he believes going negative will be necessary to help stimulate an economy heading for recession and very low inflation.

Meanwhile, banks are having to check over all their systems, documentation and legal forms to ensure the negative sign will even be recognised.

It’s similar to the system-wide overhaul that took place just over 20 years ago ahead of the new millennium. Back then it was fear that computer systems wouldn’t be able to cope with 21st-Century dates, particularly the 00 of 2000; now it will be tweaks to allow for a negative sign.

Antonia Watson, chief executive of ANZ New Zealand, said there was a parallel with Y2K in that a negative sign was something that wasn’t contemplated when many computer systems, legal agreements and business practices were designed.

“That doesn’t mean that nothing can cope with it, it just means we have to systematically go through all our systems to make sure they can. “It is not just technical, it is legal, it is our documentation, it’s business practice, it’s helping customers to understand it.”

Watson said the ANZ had been working on the changes for more than a year already, with a team spread across the bank.

“It’s not something we are starting today. It’s something we have been working on for a year, maybe longer. As soon as it looked like interest rates were getting lower, it’s one of those things you have to make sure you are ready for as a matter of good business planning.”

As well as making changes to its systems, Watson said it was about preparing customers for the change.

In some countries negative interest rates have seen banks paying borrowers to take out a mortgage, while depositors pay the bank to look after that money.

Watson said that was very unlikely to happen to retail customers of New Zealand banks.

“If you look around the world there are many jurisdictions that have gone to negative interest rates and it’s very few and far between where you have seen an actual retail interest rate go negative — either us paying people to borrow money from us or people paying to put their money in the bank. You see that in the big end of town in the wholesale and the swap transactions but it’s been very rare to see it at the retail end.”

In New Zealand the banks were also heavily reliant on retail deposits to fund lending, Watson added. “That’s another thing to put into the mix when you make those decisions.”

But she said a negative interest rate would put more pressure on rates to fall further. That’s bad new for savers and good news for borrowers.

“The pressure is definitely downwards on all interest rates because the OCR is low and the signals are we are not going to see interest rates increasing any time soon. But a situation where a retail depositor is paying to put their money in the bank seems a long way away.”

However she says it can’t be ruled out because of the uncertainty in the current coronavirus environment.

“It depends on how long this lasts for. If we reach peak unemployment in September, if New Zealand keeps doing as well as we are doing and we can see the light at the end of the tunnel, albeit it’s going to be some tough times for a while, you would hope that you go nowhere near there because we will be recovering long before you go so extreme.”

ANZ’s economists are not predicting a negative OCR at the moment but are signalling it could happen.

Those most likely to be affected are at the wholesale end — big corporate borrowers and depositors and interbank transactions.

It sounds like another costly exercise for the banks, although Watson won’t put a figure on how much it will ping the country’s largest bank.

“It is another cost.”

Watson said

ANZ was aiming to be ready for the change by December.

Other banks say they also working on it. ASB executive general manager corporate banking, Nigel Annett, said: “We are working with the Reserve Bank on this as a priority, and have put in place a programme of work to ensure our systems and products have negative rates capability ready when needed.”

A spokesman for the BNZ said work was well under way at the bank. “We are keeping RBNZ updated with progress.”

A Westpac New Zealand spokesman said the Reserve Bank had said it planned to assess its capability to operate with zero or negative interest rates towards the end of the year.

“We are currently working to accommodate that request.”

Antonia Watson, chief executive, ANZ NZ