Jun 23 2020
With interest rates approaching historic lows, the Reserve Bank of New Zealand (RBNZ or Te Putea Matua) has been exploring a range of alternative monetary policy tools to stimulate the economy. While economic conditions in New Zealand appear to be improving, the RBNZ has signalled negative interest rate policy (NIRP) could be implemented if further stimulus becomes necessary. Over recent months, the RBNZ has been in discussions with financial institutions regarding their ability to operate in a negative interest rate environment.
‘Negative interest rates would reduce revenue for banks and other financial institutions, as industry operators would face pressure to reduce mortgage rates to match the cash rate,’ said IBISWorld Senior Industry Analyst, Yin Yeoh.
Why would negative rates be needed?
While New Zealand is recovering from the effects of the COVID-19 lockdown, economic sectors such as tourism are likely to remain moribund for up to two years, until international travel resumes. Negative interest rates may be used to jump-start the economy through reducing retail lending rates, stimulating business investment and consumer spending. A negative cash rate could also weaken the New Zealand dollar, in turn boosting industries that rely heavily on exports, such as the Cheese, Butter and Milk Powder Manufacturing and Wine Production industries.
‘Negative rates may be used to counter low or negative growth, high unemployment, stagnant wages and low inflation. However, the effectiveness of this policy is likely to be limited, given the historic examples of negative rate policy shown in other countries,’ said Ms Yeoh.
Negative retail interest rates
The introduction of negative rates overseas has led to instances of consumers being paid to borrow funds. Following the introduction of negative rates in Europe, Denmark’s Jyske Bank introduced the world’s first negative mortgage interest rate in 2019. With this introduction, eligible borrowers can take out a 10-year mortgage at -0.5%. Finland-based Nordea Bank has recently launched a 20-year fixed rate mortgage with 0% interest.
While consumers may be paid to borrow, it is unlikely they would ever be penalised by being charged interest on bank savings.
‘Experience abroad suggests deposit rates are likely to end up marginally above zero. Banks and other financial institutions are reluctant to offer negative deposit rates as consumers could turn to hoarding physical cash, which in turn can constrain the supply of bank credit. Additionally, households are likely to divert excess cash to pay off debt, such as a mortgage, rather than place it with a financial institution that provides a negative interest rate,’ said Ms Yeoh.
Negative interest rates would threaten the margins of banks and other financial institutions, by squeezing the spread between deposit and lending rates. Banks have already suffered from this problem, with falling interest rates in New Zealand hindering performance. Nine consecutive cash rate cuts since June 2015 have led to exerted downward pressure on margins. The Banking industry is anticipated to fall at an annualised 7.6% over the five years through 2020-21, while the Non-Banks and Other Financial Institutions industry is expected to decline at an annualised 2.6% over the same period.
‘In a negative cash rate environment, the revenue and profit margins for these industries are likely to be further eroded,’ said Ms Yeoh.
IBISWorld reports used to develop this release:
- Banking in New Zealand
- Non-Banks and Other Financial Institutions in New Zealand
- Cheese, Butter and Milk Powder Manufacturing in New Zealand
- Wine Production in New Zealand
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647