The Reserve Bank and Treasury have begun contingency planning to introduce negative interest rates or large scale quantitative easing.

The moves will be used if the Bank runs out of room to drop its Official Cash Rate any further.

Yesterday the Bank surprised financial markets by dropping the OCR by 50 basis points to one per cent — the same as Australia.

Reserve Bank Governor Adrian Orr said this decision had been made by the Bank’s Monetary Policy Committee against a background of GDP growth slowing over the past year “and growth headwinds are rising”

And he said there heightened uncertainty and declining international trade which had contributed to lower trading-partner growth.

The Bank’s goal in dropping the OCR is to give the economy a push to avoid any increase in unemployment and to try and stimulate some inflation.

“Wake up, go and spend,” was the message said Orr.

But Bank economists were late yesterday warning that the move would kickstart the property market; Westpac forecast it could stimulate a seven per cent increase in property prices next year.

The Bank has produced research suggesting that low inflation since the Great Financial Crisis (GFC) of 2007 – 08 has impacted on low wage growth.

“Our analysis finds that low past actual and expected CPI inflation has contributed significantly to low nominal wage inflation since the GFC,” the Bank says in the Monetary Policy Statement it has issued to accompany the OCR drop.


The report suggests that wages have been squeezed by firms having to pay higher import costs in New Zealand dollars since 2007, which has left with less room to raise wages.

But the problem the Bank now faces is that it is running out of room to drop interest rates to stimulate the economy.

That is why it has begun contingency planning With Treasury.

“We are well advanced on the work,” he said.

“Of course, it is confidential to the Reserve Bank because it has implications for markets and pricing.

“But we would be negligent not to be doing the work about how we do negative interest rates; how we might do asset purchases; how we might do forward guidance different to just our forecasts; how we might do other forms of intervention and so we are looking at the full tool suite.

“We’re working very closely with our Treasury colleagues as well because some of it is fiscal policy operated through a monetary institution.”

The most radical of the measures being looked at by the Bank is negative interest rates which would see people investing in term deposits or other bank savings schemes, pay the Bank to look after their money.

This would mean the banks could then on-lend that money at very low-interest rates.

“But without doubt globally when you’re looking at Europe, Sweden and Japan all with negative interest rates and with us at one per cent and many other economies below one per cent its easily within the realms of possibility that we might have to use negative interest rates. “

Reserve Bank Governor Adrian Orr

However, there would be a huge political dimension to negative interest rates.

In Germany, there have been fears that negative interest rates were driving support for the populist anti-immigrant ADF party because they deprived savers of income.

That could be an issue here for NZ First with its strong appeal to retired people.

But NZ First Leader and Deputy Prime Minister, Winston Peters yesterday wasn’t willing to comment on any reaction his party might have.

“We would only address that issue as a government, and we haven’t had that conversation yet,” he told POLITIK.

Orr said the balance between the benefits to the economy between savers and borrowing favoured borrowing.

“If you’re unhappy with the returns you get on your savings then it’s about thinking around what are alternative uses for my savings,” he said.

“What are alternative investments.

“And its the alternative investments putting your capital to work that is what creates the expected demand that we’re talking about.

“We are absolutely convinced that the weight sits on lower interest rates because they mean more spending as opposed to lower interest rates, which mean less interest income and hence less spending.

“It’s very clear that investment consumption and government spending will far outweigh lower deposit rates.”

But regardless of yesterday’s interest rate drop, the Bank is still forecasting lower growth for the next 12 months though it expects growth to be running at three per cent for the June 2020 year.

From then on its forecasts are in line with Treasury’s Budget forecasts which see growth slipping down to 2.4 per cent in 2022.

Overall, Orr is optimistic.

We see low-interest rates and increased government spending being able to support a pickup in demand over the coming year,” he said.

“Business investment is also expected to grow, given the low-interest rates and given some ongoing capacity constraints.

” Increased construction activity will also support economic activity pick up and demand in New Zealand.

“Our actions today demonstrate our ongoing commitment to ensure inflation increases back to the midpoint of the target and that employment remains near its maximum sustainable level.

“We are forward-looking.

“The country is in a great position in the monetary and fiscal policy are operating as one would expect based on our mandate.