Negative OCR predicted

A DEEPER economic downturn will force the Reserve Bank to cut the official cash rate (OCR) below zero in November, according to new forecasts by Westpac economists.

‘‘We expect the RBNZ will reduce the OCR to 0.5% in November 2020,’’ said Westpac chief economist Dominick Stephens.

But while a negative OCR would help keep mortgage rates low, it would not be expected to flow through to negative mortgage rates, he said.

‘‘In overseas jurisdictions with negative official interest rates, retail rates have almost always remained positive.

‘‘The lower the OCR goes, the less marginal impact it would have on retail rates such as mortgage rates . . . a 75basispoint cut from 0.25% to 0.50% would bring mortgage rates down, but not by anything like as much as 75 basis points.’’

The timing was not certain and would largely depend on when the trading banks’ systems were ready to deal with a negative OCR, he said.

In March, the Reserve Bank also committed to holding the OCR at 0.25% for 12 months.

Mr Stephens argued that a change to that stance would be well understood by the market, given the extraordinary nature of the Level 4 lockdown.

He acknowledged the Reserve Bank had already made cuts and had committed to buying $33 billion worth of government and local government bonds.

But more was needed, with inflation likely to drop below 1% without further largescale fiscal and monetary policy response.

‘‘Monetary policy not only needs to come to the party, it needs to spike the punch.’’

Even prior to the Covid19 pandemic, Reserve Bank governor Adrian Orr had indicated a negative OCR was possible in New Zealand.

Negative interest rates had been operating just fine around the world and should be viewed as an extension of traditional monetary policy, Mr Orr has said.

Yesterday’s report from Westpac economists constitutes a downgrade to their outlook.

‘‘We now expect a deeper decline in Junequarter GDP of 16% , because the Alert Level 3 restrictions are tighter than we previously allowed for,’’ Mr Stephens said.

Westpac also allows for a quicker move to Level 2 than previously assumed, resulting in a ‘‘more vigorous’’ thirdquarter rebound.

However, on balance, Mr Stephens now expects the recovery phase will be slower, taking longer to overcome the damage done by unemployment and business failures. — The New Zealand Herald