What negative interest rates mean

There’s been a lot of talk about negative interest rates lately, but what could it mean for you? Will your bank start paying you to have your home loan with them? Will you have to pay the bank interest on your savings rates? Kiwibank’s Chief Economist, Jarrod Kerr, talks through the implications for borrowers and savers.

Kiwibank's Chief Economist, Jarrod Kerr.

How the Reserve Bank sets the tone

When you hear commentators talk about negative interest rates, they're not talking about what you're paying on your home loan, they're talking about the Official Cash Rate (OCR). This is the interest rate that is set by the Reserve Bank of New Zealand, which is the banker of all the banks that operate in New Zealand. Kerr says the OCR is the starting point for all interest rates in our economy. “So when the central bank increases or decreases the OCR, all interest rates follow, to varying degrees.”

Already at a record low

Economies around the world have been hit hard by COVID-19 and New Zealand is no exception. In an effort to stimulate the economy the Reserve Bank has already cut the OCR to a record low. “The theory is if you keep cutting interest rates lower and lower, that forces people to do a little bit more with their money rather than just keeping it in cash or tied up in bonds. You’re trying to push people to do more with their money and hopefully stimulate economic activity.”

What happens next?

There’s speculation that the OCR will slip into negative territory next year. But Kerr says that the interest rates you pay on your loans or earn on your savings (known as retail rates) won't follow the OCR below zero. “Central banks have been really clear that they don’t want retail rates to go negative, but they do want them closer to zero than they are now.”

This means interest rates on your home loans, personal loans or business loans will fall, but they won't turn negative. If you have savings, like term deposits, you’re also likely to see cuts to the interest you’re earning, but again, those rates won’t fall below zero.

Clipping the wings of the Kiwi dollar

Kerr says a negative interest rate would also have a big impact on the New Zealand dollar. “We could see quite a significant decrease in the Kiwi dollar, but that’s a good thing, because if a negative OCR drives the Kiwi dollar lower, that will help our exporters in their time of need.”

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