Markets price in negative interest rates

Financial markets have priced in an increased chance of a negative official cash rate after the Reserve Bank mooted the idea last week.

Monday, May 18th 2020, 3:09PM

While the OCR was left unchanged the Reserve Bank's Monetary Policy Committee last week noted "a negative official cash rate will become an option in future".

The central bank said financial institutions were "not yet operationally ready", but markets have moved since the announcement.

The first negative OCR is priced in for April 2021, according to Kiwibank trader Ross Weston. 

"The RBNZ gave themselves optionality last week, with the markets' focus on the OCR track which was cut short, seemingly leaving a cut an option only after March 2021," Weston said.

He added, markets "jumped" after the Reserve Bank pointed out it was "prepared to use additional monetary policy tools if and when needed, including reducing the OCR further".

In Kiwibank's latest economic analysis, Weston points out the first negative OCR, of -0.06% has been priced in for April 2021. Markets price in a low of -0.12% for August 2021. 

Kiwibank trader Hamish Wilkinson described the market pricing as "priced expectation". 

As traders predict a fall in the central bank rate, home loan providers have slashed mortgage rates in recent weeks. 

Each of New Zealand's big four banks now has a sub-3% mortgage offering, while TSB has also launched a 2.89% one year rate on May 12.

As home loan rates continue to fall, keep up to date with the latest rates here.


Tags: Kiwibank Mortgage Rates OCR OCR forecasts RBNZ Reserve Bank

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