How low can they go?

14 January 2021

What negative interest rates could mean for you and your KiwiSaver savings

With the economy having been badly affected by the COVID-19 pandemic, there’s been a lot of discussion about the potential for negative interest rates. As the New Zealand economy has bounced back a bit better than expected, most commentators agree that heading into negative territory is now less likely. But things can change quickly and negative interest rates remain a possibility – so here’s a brief overview of what they could mean for you.   

What are negative interest rates and how would they work?

To help the economy recover from COVID-19, the Reserve Bank wants to see lower interest rates. When interest rates are low, people are more likely to spend – and that’s good for the economy. 

But interest rates are already historically low. The Official Cash Rate (OCR), which is the interest rate that retail banks like ANZ Bank receive for any money they have with the Reserve Bank – is just 0.25%. So the Reserve Bank has been considering cutting the OCR to below 0% - in other words, to a negative interest rate.

Would that mean banks would charge customers to deposit their money? Probably not. Banks need customer deposits so they can lend that money out to other customers.

But it does mean that retail banks would have to pay the Reserve Bank for any money they have with them. That gives them a big incentive to lend that money out instead - even if they have to lend it out at reduced interest rates. 

And if lending interest rates reduce, so will the interest rates earned on deposits and fixed interest investments such as savings accounts, term deposits and bonds.  

What does this mean for investments like KiwiSaver?

Most KiwiSaver funds invest in ‘income’ assets (such as cash, bonds and other fixed interest investments). The proportion of income assets depends on which fund you’re invested in – for example in the ANZ-managed KiwiSaver schemes, the Conservative Fund has 80% income assets, whereas a Growth Fund only has 20%. Income assets are heavily affected by interest rates, which means in a low or negative interest rate environment, it may be harder to get good returns from these investments. 

But it’s not impossible. One of the advantages of ANZ-managed KiwiSaver funds is that they’re ‘actively’ managed. Our active management approach means we constantly monitor the markets for investments that deliver better returns, without increasing risk.

For example, we might invest in bonds issued by corporates, cross-border organisations such as the World Bank or individual government agencies, which tend to offer better returns than ordinary government bonds. We might also invest in bonds with different durations or currencies.

‘Passively’ managed funds, in contrast, simply follow an index and aim to deliver returns in line with the market. At ANZ Investments, we aim to use the expertise and knowledge of our investment team to outperform the market.

While we’re now much less likely to see negative interest rates, there’s no doubt that rates will remain low for quite some time. 

What can you do?

The best thing for you to do is to make sure you’re invested in the right fund for you. Everyone’s situation is different and things change over time. Your fund choice should be based on your personal circumstances, including your investment goals, how much time you have to invest and how much risk you’re willing to take.

We recommend you regularly review your fund choice to make sure it’s still the best choice for you – use our Risk Profile Tool to help or talk to a financial adviser.

Important information

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.

ANZ New Zealand Investments Limited ('ANZ Investments') is the issuer and manager of the ANZ KiwiSaver Scheme and the ANZ Default KiwiSaver Scheme (together, the 'schemes'). Important information is available under terms and conditionsDownload the guide and product disclosure statement.

Investments in the schemes are not deposits in ANZ Bank New Zealand Limited, Australia and New Zealand Banking Group Limited, or their subsidiaries (together ‘ANZ Group’), nor are they liabilities of ANZ Group. ANZ Group does not stand behind or guarantee ANZ Investments. Investments are subject to investment risk, including possible delays in repayment, and loss of income and principal invested. ANZ Group will not be liable to you for the capital value or performance of your investment.