Implications of Negative OCR?

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Batman

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#270210 28-Apr-2020 16:25

I read that there is a possibility of negative OCR, https://www.stuff.co.nz/business/121309815/coronavirus-negative-cash-rate-in-november-westpac-chief-economist-predicts

What does that mean in English?

I really have no idea.

Keen to hear people's thoughts ideas and explanations.

Maybe we should have a "Money" or "Financial" forum heading/section?

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#2472861 28-Apr-2020 16:35

Well the short answer is that you're unlikely to get a negative mortgage rate because banks still make profits even if you don't. But I believe that with a negative interest rate, you pay back less than you borrowed instead of more.

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#2472863 28-Apr-2020 16:37

I'm curious about this as well. We're up for a mortgage rate renewal - is it likely that these will drop even more in the near future?

jjnz1

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#2472865 28-Apr-2020 16:38

So more like a Government incentive? They subsidize the bank for you buying a house, to help keep interest rates very low, while still allowing banks to profit?

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#2472868 28-Apr-2020 16:47

Its effectively a form of stimulus package. One that, done correctly, could prove to be much more impactful than a one off cash payment. By cutting the OCR it allows banks to provide business loans. Business loans are invested in building future infrastructure creating/saving jobs.

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#2472914 28-Apr-2020 17:35

Senecio:

Its effectively a form of stimulus package. One that, done correctly, could prove to be much more impactful than a one off cash payment. By cutting the OCR it allows banks to provide business loans. Business loans are invested in building future infrastructure creating/saving jobs.

I can't see how it will be more of an impact than one off cash payments, in terms of an immediate impact. Cash payments would apply to everyone, not just people who have borrowed, and if they do it right, and make sure everyone spends it, then it could provide a huge boost to the economy. Shops and businesses need people buying things. But we can't have people just saving their cash payment, it needs to be used. So some form of prezzie type card with an expiry date I think is a good idea. But I don't think it is an either or situation. But both QE and negative interest rates are not a good sign IMO.

Also if interest rates do drop too low, why would people keep their savings in the bank? Especially when there is no government deposit guarantee in NZ, which is something most other similar countries including Australia.

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#2472939 28-Apr-2020 18:34

mattwnz:

I can't see how it will be more of an impact than one off cash payments, in terms of an immediate impact. Cash payments would apply to everyone, not just people who have borrowed, and if they do it right, and make sure everyone spends it,

If it's cash, you lose control of it immediately. You can't "make sure everyone spends it".

An informal poll of 3 people resulted in 100% putting the windfall away for a holiday next summer. Not scientific, and a large margin of error, but I'd expect that would be a typical middle class response.

If you want to make sure it gets spent, I guess you could give away vouchers, with an expiry date.

But it would be simpler if the government just spent the money itself.

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#2473136 29-Apr-2020 09:07

I'm curious about this as well. We're up for a mortgage rate renewal - is it likely that these will drop even more in the near future?

Negative OCR could mean that mortgage rates go down, but remember that a lot of the banks rely on deposit funds and overseas borrowings to have cash to lend out.

This could mean that the rates plateau where they are or even go up, depending on the cost of funds and a whole lot of other factors (demand, competition etc)

My mortgage is up for renewal in a month or so and I am also watching this space eagerly, but at the end of the day, the rates are at historic lows as it is...can't wait forever to lock in a low rate and should never regret your choice as it's made at a point in time.

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driller2000

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#2473158 29-Apr-2020 09:41

As per article below:

Interest rates wouldn't go negative for households/businesses

He made the point: “The lower the OCR goes, the less marginal impact it would have on retail rates such as mortgage rates. Thus a 75-basis point cut from 0.25% to -0.50% would bring mortgage rates down, but not by anything like as much as 75 basis points.

“We estimate that, in New Zealand, the OCR could go down to -1% before further cuts had zero impact on retail rates. This effective lower bound is lower in New Zealand than in many other countries, because in New Zealand bank deposit rates are higher relative to the OCR.

“To clarify, we do not expect any of the interest rates paid or received by New Zealand households and businesses to go negative.

https://www.interest.co.nz/news/104728/westpac-chief-economist-and-triple-t-consulting-founder-expect-rbnz-will-have-take-ocr

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#2473166 29-Apr-2020 09:54

Its not likely you would see negative retail mortgage rates in NZ as most of their funding is sources from retail deposits (the RBNZ has been encouraging banks to do this more and more) ... retail deposit rates get very sticky close to zero as customers won;t stand for a negative return, they will just hoard the cash at home)

Negative interest rates are helpful for the big end of towb, commercial lending and in particular government borrowing, BCRs on may government projects go out the window when you don't have to worry about funding costs, and you simply have to pay back the capital borrowed(or less)

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#2473200 29-Apr-2020 10:54

One impact seen elsewhere where they already have negative rates is banks charging savers for holding money....

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#2473222 29-Apr-2020 11:16

mattwnz:

I can't see how it will be more of an impact than one off cash payments, in terms of an immediate impact...

As others have said. While a one off cash payment is an effective form of stimulus, ensuring businesses have continued access to affordable borrowings to allow them to invest in future infrastructure can be more effective, even if over a different horizon. The best stimulus package would be a multi pronged approach.

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#2473223 29-Apr-2020 11:17

Geektastic:

One impact seen elsewhere where they already have negative rates is banks charging savers for holding money....

Fixed charge, or charged based on the amount of savings?

If later, look at moving money into something that’ll hold value, or buy a house to increase debt and rent out.

Bonus bonds if price remains at fixed $1, credit cards don’t pay interest, so could overpay card if bank charges based on money in bank.

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#2473229 29-Apr-2020 11:28

Geektastic:

One impact seen elsewhere where they already have negative rates is banks charging savers for holding money....

Guess the Bank of the Bottom Drawer will come into action then :)

Seriously, the banks doing that would have a major negative impact on the economy.

Fred99

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#2473230 29-Apr-2020 11:28

Geektastic:

One impact seen elsewhere where they already have negative rates is banks charging savers for holding money....

No. Retail deposit rates are still above zero.

For example here's BoJ data (PDF)

https://www.boj.or.jp/en/statistics/dl/depo/tento/te200422.pdf

Average interest rate on deposits : 0.001% (But think of how little tax you'll pay on the interest!).

There is a significant systemic risk to an economy from negative rates (apart from the obvious associated fact that if you need negative rates for stimulus then you're already in very deep trouble). The retail banking system is given further disincentive from holding cash reserves, they'll hold the bare minimum and unless prudential regulation is strictly enforced, they'll probably cheat on that as well. You could just trust them to do the right thing...

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#2473559 29-Apr-2020 18:12

A negative ocr would only really impact the interface between the main banks and the central bank.

Banks would not lend money to anyone at a negative rate and nobody would deposit money with the banks at a negative rate.

The effect is intended to increase the ability of the large banks to access cash and lend it out in order to stimulate the economy.

As far as I can remember the only times that banks have imposed negative interest rates on their depositors have been occasions when a country (usually Switzerland) has been trying to discourage in influx of money from overseas that has been looking for refuge banknig.

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