RBNZ preparing to launch negative rates - Capital Economics
Australia & New Zealand Economics

RBNZ preparing to launch negative rates

RBNZ Watch
Written by Ben Udy

The RBNZ is reaching the limits of its asset purchase program. We therefore doubt the Bank will make any significant policy changes at its meeting on Wednesday 23rd September. Even so, the economy still faces significant hurdles. We think inflation was set to disappoint even before the second outbreak in August set the recovery back. We think the RBNZ will launch negative rates in 2021.

  • RBNZ pushing QE to its limits
  • Second wave delays the economic recovery
  • The RBNZ set to launch negative rates next year

The RBNZ is reaching the limits of its asset purchase program. We therefore doubt the Bank will make any significant policy changes at its meeting on Wednesday 23rd September. Even so, the economy still faces significant hurdles. We think inflation was set to disappoint even before the second outbreak in August set the recovery back. We think the RBNZ will launch negative rates in 2021.

Near doubling of QE program

The RBNZ expanded its asset purchasing program at its August meeting, increasing the cap on purchases from $60bn to $100bn. But it has also extended the time frame of the program, noting the new cap was until mid-2022, one year longer than the original mid-2021 deadline. As such, the new cap would just be consistent with the RBNZ continuing the pace of asset purchases for an additional year. But the Bank also noted the additional purchases would be front-loaded. Indeed, the pace of asset purchases has increased since the Bank’s August meeting, with the Bank buying $6.0bn over the 30 days to 16th September. (See Chart 1.)

Chart 1: RBNZ Asset Purchases ($bn)

Sources: RBNZ, Capital Economics

If sustained, the current pace of asset purchases would be consistent with the RBNZ hitting its new $100bn cap by the middle of next year. It’s therefore likely that purchases will eventually be slowed. By mid-2022 the RBNZ will hold around 60% of the outstanding government bonds, more than any other central bank that has launched quantitative easing.

Activity in New Zealand takes a second hit

GDP fell by 12.2% q/q in the second quarter, lead by a sharp fall in constrctuion and manufacturing activity. And while activity had been recovering rapidly in recent months, on 12th August New Zealand discovered new cases of the virus in the community in Auckland for the first time in more than 100 days. The discovery prompted the government to move Auckland, which makes up around one third of New Zealand’s population, into a strict lockdown which prohibits most retail activity. The rest of the country was required to reinstate social distancing restrictions. Those restrictions were in place for two and a half weeks and have since been mostly relaxed.

Chart 2: Routing Requests & Lockdown Stringency

Sources: Apple, University of Oxford, Capital Economics

The tightening in restrictions resulted in activity easing sharply in mid-August. (See Chart 2.) Apple maps data showed that movement fell to around the levels measured in May. Movement has continued to improve since the drop but remains below the highs reached after the virus was initially eliminated.

We still expect the New Zealand economy to bounce back faster than many other countries. But the risk of new outbreaks is likely to temper the rebound in investment and keep the household savings rate high.

Admittedly, the unemployment rate actually fell in Q2. And while employment declined a touch, the deterioration in the labour market was clearly less pronounced than we had anticipated. But now that the government’s generous wage subsidy scheme has come to an end for most businesses, the number of people receiving unemployment benefits has started to creep up again. And given that the wage subsidy will expire even for the hardest hit businesses over the coming months, we suspect the unemployment rate is likely to rise in the second half of this year.

Wage growth fell sharply in Q2 and we suspect the excess capacity in the labour market will further suppress wage growth in the coming months. That’s why we think inflation will remain subdued for years to come. (See Chart 3.) Taken together the renewed hit to growth and the ongoing weakness in inflation suggest that the RBNZ has more work to do.

Chart 3: Wages and Inflation

Sources: Refinitiv, Capital Economics

Negative rates becoming increasingly likely

The RBNZ believes it has almost exhausted its QE firepower. The Bank had previously estimated that it could hold 50% of outstanding government bonds and still maintain a liquid bond market. But the Bank argued in August that the amount of government bonds not held by the Bank shouldn’t fall below 20% of GDP in order to keep the bond market functioning.

The fiscal accounts released by the Treasury ahead of the New Zealand election show that fewer bonds will need to be issued than was initially expected as the initial economic deterioration was not as severe as expected. Even so, the Treasury announced yesterday that the outstanding amount of New Zealand Government Bonds (NZGBs) will reach $168bn by June 2022. With the Bank set to purchase $100bn of bonds by then, that would leave $68bn of bonds for other investors to acquire, equivalent to 21% of GDP.

The upshot is the Bank is unlikely to increase the cap on its QE programme further unless the Treasury revises up its bond issuance intentions or it changes its assessment of liquidity conditions in the bond market yet again. It will therefore be looking for other unconventional tools to stimulate the economy. In the minutes of the last RBNZ meeting the Committee “expressed a preference for considering a package of a negative OCR and a ‘Funding for Lending Programme’ in addition to the current Large Scale Asset Purchase (LSAP) programme”. They have instructed staff to prepare such a package. This is consistent with our long-held belief that the RBNZ would eventually be forced to take rates into negative territory. We expect the RBNZ to cut rates to -0.25% at the beginning of 2021. But the change in tone by the Bank means the risk is that it occurs even earlier.

We were the first to forecast negative rates in New Zealand, but the signalling from the Bank at the last meeting means that the market has now laregly come around to our view. (See Chart 4.)

Chart 4: RBNZ Official Cash Rate (%)

Sources: Refinitiv, Bloomberg, Capital Economics

Even so, given that we expect rates to go negative sooner than the market ancitipates, we still expect the shift to negative rates to weigh on the New Zealand dollar causing it to drop from US$0.67 today to US$0.65 by the end of this year.

Table 1: RBNZ Monetary Policy Background Information

Interest Rate Meetings

The cash rate is reviewed seven times each year, with the policy decision announced at 2.00 pm on the scheduled day. The Monetary Policy Committee includes the Governor, the Deputy Governor, two other internal appointees, three external appointees and a non-voting Treasury observer.

Release of Minutes

A non-attributed record of the meeting is published alongside the decision and an overview of the economic outlook, the risks and policy options discussed, any material differences of view or judgement, and an unattributed record of any vote taken.

Other Publications

The Bank publishes its Monetary Policy Statement four times a year. Its release coincides with the policy announcements in February, May, August and November.

The Monetary Policy Statement sets out how the Bank proposes to achieve its targets, how it proposes to formulate and implement monetary policy during the next five years and how policy has been implemented since the last Monetary Policy Statement. It is accompanied by a press conference.

Disclosure of Voting

Non-attributed votes will be published when there is not a consensus.

Policy Framework

The current remit for the Monetary Policy Committee instructs the Bank to meet two objectives. First, to “keep future annual inflation between 1 and 3 percent over the medium term, with a focus on keeping future inflation near the 2 percent mid-point.” Second, to “support maximum sustainable employment”. In doing this, it must seek “to avoid unnecessary instability in output, interest rates and the exchange rate“.


Adrian Orr

Deputy Governor

Geoff Bascand

Other Members of the Monetary Policy Committee


Christian Hawkesby

Yuong Ha


Professor Caroline Saunders

Professor Bob Buckle

Peter Harris






* Denotes announcements

12th February 2020*


24th February 2021*

Cut to -0.25%

accompanied by the Monetary Policy Statement and press conference.

16th March 2020

Cut to 0.25%

14th April 2021


13th May 2020*


26th May 2021*


24th June 2020


14th July 2021


12th August 2020*


25th August 2021*


23rd September 2020


13th October 2021


11th November 2020*


24th November 2021*


Sources: Reserve Bank of New Zealand, Capital Economics

Ben Udy, Australia & New Zealand Economist, ben.udy@capitaleconomics.com