April 28, 2020 / 3:25 AM / a month ago

Westpac forecasts negative interest rates for NZ later this year

WELLINGTON, April 28 (Reuters) - Westpac said on Tuesday that negative interest rates would be a natural next step for New Zealand’s central bank as it responds to the economic fallout of the coronavirus crisis.

The lender said in a note that Reserve Bank of New Zealand (RBNZ) would lower the official cash rate (OCR) by 75 basis points to -0.5% in November this year.

“We expect that the RBNZ will signal either its intent or its willingness to move to a negative OCR at the August monetary policy statement,” Chief Economist Dominick Stephens said in the note.

The Reserve Bank of New Zealand (RBNZ) has already cut rates by 75 basis points to 0.25% in March, and pledged to keep it at that level for at least 12 months.

It also launched a quantitative easing programme in which it bought NZ$33 billion ($19.79 billion) worth of government and local government bonds.

But the massive stimulus currently being delivered to the economy would not be enough, Stephens said in the note.

“We think more will be required later this year, and a negative OCR would be a natural next step,” he said.

Inflation would drop well below 1% unless the Reserve Bank and Government act vigorously to stimulate the economy, Stephens warned.

Speaking to parliamentarians earlier this month, RBNZ Governor Adrian Orr did not rule out negative interest rates.

The New Zealand dollar was down 0.8% to $0.5966 as talk of further policy easing pushed bond yields to record lows.

Stephens also forecasted that RBNZ would almost double its quantitative easing programme to NZ$60 billion at the monetary policy meeting on May 13.

“We estimate that total government debt will be over $130 billion by June next year, so the Reserve Bank will be on track to own about 45% of the New Zealand Government Bonds on issue.”

New Zealand eased strict lockdown measures on Tuesday that saw an additional 400,000 people return to work and some businesses opening after weeks of lockdown. ($1 = 1.6675 New Zealand dollars) (Reporting by Praveen Menon)

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