World Economy

New Zealand's central bank signals possible shift to negative interest rates as coronavirus hits economy

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Key Points
  • New Zealand's central bank on Wednesday doubled the amount of bonds it will buy as part of its quantitative easing program and flagged a possible shift to negative interest rates as the Covid-19 pandemic wreaks havoc on the economy.
  • The Reserve Bank of New Zealand (RBNZ) left its official cash rate (OCR) at 0.25%, as expected, but said it was prepared to use additional tools "if and when needed."
  • The shift in policy comes as the bank predicted a massive 21.8% drop in June quarter gross domestic product growth, which would be followed by a 23.8% expansion in the next quarter.

In this article

Ten New Zealand dollars with coins.
Angelo NZ | Getty Images

New Zealand's central bank on Wednesday doubled the amount of bonds it will buy as part of its quantitative easing program and flagged a possible shift to negative interest rates as the Covid-19 pandemic wreaks havoc on the economy.

The Reserve Bank of New Zealand (RBNZ) left its official cash rate (OCR) at 0.25%, as expected, but said it was prepared to use additional tools "if and when needed" including further cuts and expanding its quantitative easing program to include foreign assets.

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The shift in policy comes as the bank predicted a massive 21.8% drop in June quarter gross domestic product growth, which would be followed by a 23.8% expansion in the next quarter.

The New Zealand dollar fell 0.6% after the RBNZ announcement. Financial market pricing for early 2021 shifted to a 100% chance of a cut, and beyond that a negative rate of -0.06% is now implied for the first time in the country's history.

The RBNZ re-affirmed its forward guidance for the cash rate to remain at 0.25% until early 2021 but said negative rates "will become an option in future."

"...discussions with financial institutions about preparing for a negative OCR are ongoing," RBNZ said in a statement announcing the cash rate decision.

The unprecedented prospect of a shift to negative interest rates comes as investors increasingly consider the possibility other central banks, including the U.S. Federal Reserve, may need to do the same amid falling consumer prices.

For now, the RBNZ's expansion of its so called "large scale asset purchase" (LSAP) program to NZ$60 billion ($36.2 billion) from NZ$33 billion was the "most effective way" to deliver stimulus, it said.

"The Committee noted that the size of the LSAP program needed to be sufficiently large to keep interest rates lower across the yield curve," the RBNZ said, adding it would also start buying inflation-indexed government bonds.

New Zealand is among a few countries to have successfully curbed the spread of the coronavirus with most businesses and offices set to open on Thursday after weeks of disruptions.

The government is expected to announce more fiscal stimulus in its annual budget on Thursday.

($1 = 1.6472 New Zealand dollars)