Negative rates 'not a game of bluff', says Reserve Bank of New Zealand official

SYDNEY (Reuters) - Negative rates in New Zealand are a real possibility and there are no concerns yet that such rates would be problematic for banks, a senior central bank official said on Wednesday.

FILE PHOTO: Pedestrians walk near the main entrance to the Reserve Bank of New Zealand located in central Wellington, New Zealand, July 3, 2017. REUTERS/David Gray/File Photo

Asked if the Reserve Bank of New Zealand (RBNZ) was merely using the threat of negative rates to put downward pressure on the New Zealand dollar, Assistant Governor Christian Hawkesby said the guidance was not “a game of bluff”.

Speaking via video link to a Citigroup conference in Sydney, Hawkesby said he was aware of the “strong scepticism”, particularly in Australia, but reiterated that policymakers were serious about negative rates as a policy option.

The RBNZ has repeatedly said negative interest rates were under consideration as commercial banks were being operationally readied to deploy them, if needed.

The RBNZ has held its official cash rate at a record low 0.25% since a larger-than-expected cut in March while pledging to do more to support the virus-ravaged economy.

New Zealand fell into its deepest economic recession on record in the second quarter, data showed last week, although the contraction was slightly less severe than analysts had expected.

Asked if there could be financial stability risks associated with negative rates including the potential for a debt bubble, Hawkesby replied that a “very weak” labour market was a bigger concern.

Hawkesby said “effective lower bound” on rates - the point beyond which further reduction in policy becomes less productive - was an evolving concept and would ultimately depend on the retail deposit curve.

The economy had surprised on the upside recently, he added, although there was still a lot of uncertainty about the outlook, meaning monetary policy will stay stimulatory for a long time to come.

“The economy is still on life support to some extent,” he said. “And, given the outlook, the economy will require continued policy support.”

Editing by Jacqueline Wong