Market Comment

NEGATIVE INTEREST RATES What are they and what will it mean?

Surveys indicate that New Zealand business has quickly picked up the pieces, responding swiftly and responsibly to the challenges created by the Covid-19 pandemic.

Since the onset of Covid-19, the Reserve Bank of New Zealand (RBNZ) has expressed a willingness to do what is required to support the economy – and with the loss of the tourism sector it means the RBNZ needs to engineer a massive lift in other sectors. To achieve this, the RBNZ is expanding its tool kit to deliver a Funding for Lending Programme (FLP) for banks coupled with a negative OCR, with the aim of driving interest rates lower.

The FLP will deliver funding to banks at levels close or equal to the OCR, so essentially, the FLP would provide cheap funding to the banks in order to provide the headroom for them to lower lending rates further. What impact the FLP will have on lending rates is hard to quantify at present – it will depend on how large the FLP is, how the interest rate is set, and what conditions the RBNZ attaches to it.

Banks also have other costs that are effectively increasing – retail deposit rates can’t go much lower and increased capital requirements will start from July 2021. It is also worth noting that markets have now anticipated the introduction of an FLP and so some of the decline in wholesale rates has already happened. What we can have some certainty on is that the FLP and negative

OCR will keep interest rates very low for a prolonged period.

UDC is seeing an increase in businesses taking advantage of reduced interest rates by upgrading and investing in new technology and equipment that will not only set them up for a more efficient and sustainable future, but will also allow them to roll with the punches brought by Covid-19. * The information in this article is an opinion of the author and does not constitue financial advice.