Economic Weekly: Who borrows wins

For all the pointy-headed chatter about RBNZ quantitative easing, negative policy rates, direct financing of banks and so on, we’re cognisant the average punter is probably wondering what it all might mean for them, should it all go ahead. Last week, we provided our take on a couple of the upshots.

First, our forecasts for term deposit rates and mortgage rates have been slashed. We think that an RBNZ scheme to lower the OCR below zero and lend directly to banks, if introduced, would heap downward pressure onto term deposit rates. This is especially so now that the banks’ minimum core funding ratio has been lowered to 50% from 75%. Cheaper bank funding costs (TDs account for around 60% of bank funding) would flow through to lower mortgage and business lending rates. They’re already at rock-bottom levels, but we see further downside. Our Senior Wealth Economist released his latest forecasts this morning. In short, we think term deposit rates could fall below 1% with mortgage rates for some terms below 2%.

Second, the promise of extremely low interest rates for years to come will continue to boost asset prices. Our previous forecast for a 6% fall in NZ house prices (itself one of the least pessimistic around) was upgraded last week to ‘just’ a 3% fall. Global equity markets also remain on a tear as investors factor in a permanently lower discount rate. Of note, the NZX 50 hit a fresh record high on Friday.

It’s worth remembering that all of this is exactly what the Reserve Bank is trying to engineer as it tries to reflate the economy. Boosting asset prices, encouraging debt accumulation, and the associated increase in inequality are unfortunate side-effects of the way easy monetary policy works. We can at least take comfort that we’re not alone. The US Federal Reserve’s commitment last week to allow inflation and employment to run hotter for longer, by keeping interest rates lower for longer than it might have in past cycles, promises to underpin all of these trends for some time to come. Where it all ends is anyone’s guess. At least us Aucklanders get to leave the house this week.