What is it about?
The question is what happens to lending rate, the deposit rate, and bank profit in New Zealand if the Reserve Bank decided to make the Official Cash Rate negative. Thus, the analysis is a counterfactual scenario.
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Why is it important?
This is important because it makes projections of future lending and deposit rates, and bank profit. The lending and deposit rates are projected to fall when the Official Cash Rate is made negative, but the projection suggests that lending rate is always higher than the deposit rate. Banks profit increases.
Perspectives
Because of COVID, The Reserve Bank of New Zealand announced that it would reduce the Official Cash rate to a negative number if needed. When the statement was made, the economy was expected to shrink further because of COVID-19. So I wanted to find out what happens to the lending rate, deposit rate, and bank profit if the RBNZ does that. While the economy contracted after COVID as expected, housing prices increased significantly because of the increase in the money supply; the RBNZ bought 100b dollars government bonds.The RBNZ was under pressure to do something to stop house prices from rising further so it kept the Official Cash rate unchanged. The results should hold qualitatively if the Official Cash rate is made negative as some future time, but recalculations might be needed.
Dr Weshah Razzak
Massey University
Read the Original
This page is a summary of: Measuring the effect of negative interest rate on New Zealand banks, SN Business & Economics, February 2021, Springer Science + Business Media,
DOI: 10.1007/s43546-020-00038-1.
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