skip to log on skip to main content
VoiceOver users please use the tab key when navigating expanded menus

What a negative Official Cash Rate could mean for you

22 October 2020

Amid growing economic concerns due to the COVID-19 pandemic, the Reserve Bank of New Zealand (RBNZ) has made it clear one policy tool at its disposal is a negative Official Cash Rate (OCR). In fact, since the 12 August monetary policy statement, several bank economists have forecast the OCR to go negative by early 2021. 

Negative interest rates are by no means a new phenomenon. In response to the Global Financial Crisis, Sweden’s central bank was the first to cut rates below zero, and since then, the European Central Bank, the Bank of Japan and the Swiss National Bank have all taken policy rates below zero.  

How a negative OCR works and why it would be deployed? 

A negative OCR would mean the Reserve Bank of New Zealand charges retail banks, such as ANZ, to deposit their funds, or excess reserves, with them overnight. By doing this, the central bank is incentivising these banks to lend out more money to their clients, even if it’s at a reduced rate. 

The rationale behind negative or ultra-low rates can, to some degree at least, be boiled down to this: cheaper money will lead to increased borrowing, driving spending and investment, which will spur economic growth. 

It’s important to remember that if the RBNZ cuts the OCR into negative territory it doesn’t necessarily mean bond yields and bank deposit rates go negative. In fact, as it stands, negative deposit rates are unlikely. Still, you need to be prepared for lower deposit rates and the challenges they bring. 

 

What is ANZ Investments doing? 

It’s no secret that with interest rates at record low, generating a return on a bond portfolio can be challenging. However, one way to earn attractive returns in a low or negative interest rate environment is through active management. While a passive strategy will mirror a standard bond index, an active manager can select various instruments, including government bonds, corporate bonds and other debt-related products, and then diversify through such tools as duration and currency to help navigate the current environment.  

At ANZ Investments, we take an active management approach to bond investing, which means we have the capability and the right people to steer us through these unprecedented times. 

To navigate the challenging interest rate environment where the hunt for yield is becoming more difficult, we are constantly on the lookout for higher-yielding fixed interest-related investments without compromising the quality or safety of the underlying asset. Some of these assets in our domestic and international portfolios that satisfy this framework include: 

  • Corporate bonds: bonds issued by corporates will, in most cases, offer higher yields than those issued by the government.
  • Supranational bonds: Another type of bond available for our international and domestic fixed interest portfolios that more often than not offer higher yields than government bonds are supranational bonds, also known as Kauri bonds. These bonds are often issued by organisations that cross international boundaries that need to raise funds, such as The World Bank.
  • New Zealand Government agencies: In New Zealand, individual Government agencies will, from time to time, issue their own bonds to raise money, which at ANZ Investments we can and have invested in. Again, these tend to offer a higher yield, without compromising quality. One example of these is Housing New Zealand.  

The potential effect of negative rates on the New Zealand dollar

If the RBNZ does cut the OCR into negative territory, there could be a flow-on effect to the New Zealand dollar. A negative OCR could weaken the New Zealand dollar as it becomes less attractive for overseas investors to buy assets denominated in New Zealand dollars. 

Furthermore, this negative OCR rhetoric comes at a time when some of the RBNZ’s peers – notably the US Federal Reserve and Reserve Bank of Australia – appear to be shying away from negative rates. 

However, there are benefits to a lower currency, particularly for the country’s export sector. Exporters have to repatriate their overseas profits to New Zealand, so a weaker local currency means they earn more New Zealand dollars for their overseas earnings. 

 

What can you do?

As the RBNZ continues to communicate and update its interest rate policy, you can expect us to keep you up to speed on any changes and implications for your investments, as well as any significant alterations we make to our interest rate strategy.  

This article has been prepared by ANZ New Zealand Investments Limited for information purposes only and it should not be treated as financial advice. It is recommended that you seek advice from an authorised financial adviser which takes into account your individual circumstances before you acquire a financial product.