Things are getting weird in the world of interest rates.
Don't panic – your bank isn't about to start charging you interest to hold your money.
Things aren't that weird yet.
And it's definitely not planning to pay you to take out a mortgage.
While negative interest rates (or the possibility of them) are pushing down the cost of borrowing, the action so far is mostly at the wholesale and institutional level.
Yes, there's that one bank in Denmark offering homebuyers mortgages at negative 0.5 per cent, but that's not likely to be replicated in New Zealand.
The Danish retail mortgage system is unique and highly complex. We'll come back to that.
For most of us, just wrapping our heads around the basics of negative rates – and the other arcane monetary policy tools now on the Reserve Bank's radar - is going to be hard enough.
We're headed down the rabbit hole, right?
With about one quarter of global bonds (US$17 trillion worth) now providing negative returns, we're through the looking glass and into the upside-down world.
It's been a great narrative for headline writers: roll up for the magical, mystery monetary policy tour.
If I was hoping to hitch a ride on that bus, Reserve Bank governor Adrian Orr is not having a bar of it.
"Zero is no magic number," says Orr.
Negative interest rates have been operating just fine around the world - as well as other forms of monetary policy easing, he says.
Japan, Orr points out, has been in this territory for much of the past 20 years.
The otherwise colourful Reserve Bank governor sees negative rates in black and white - as a clear and relatively straightforward extension of traditional monetary policy.
We need to stop thinking this stuff is weird and put it in context of the world we live in now, Orr says.
He believes New Zealanders need to shift their mindset from the inflation fighting mentality that dominated through the 1970s, 80s and 90s.
"Central banks were given a clear goal and the independence to achieve it," he says of that era. "And we succeeded … we're now in a low nominal world. And people are not used to that."
In other words, all that has really happened is that several per cent of inflation has been removed from the equations.
In real terms, investors should be no better or worse off at a 1 per cent cash rate than they were at an 8 per cent cash rate. What might have looked like better rates of return were always being undermined by inflation eating away at a saver's principal.
"With negative interest rates, the idea is that it's no different," Orr says. "All you are doing is changing the shape of the yield curve; you still are incentivising people to either spend now or save now, relative to the future."
In a "low nominal world" like we have now, it just means the neutral cash rate is much lower, which means that when central banks need to stimulate the economy, then the actual rates will go much lower than we are used to, Orr says.
"And at times you might go through zero. And people get a bit confused about that."
Of course, the whole conversation is based on the assumption - on current projections - that New Zealand won't be going negative, Orr adds.
But: "if that's where the world goes then we're part of that."
The language coming out of the Reserve Bank (RBNZ) since this month's double rate cut suggests that Orr and his team have done their homework on this stuff.
Like theoretical mathematicians, they are comfortable looking along the series of numbers on a yield curve without seeing any special roadblock or barrier at zero.
But that's not easy for the rest of us to visualise.
We live in a physical world where the buck stops with hard cash.
"He's right, it is just a number," says BNZ interest rates strategist Nick Smyth about Orr's take on "zero".
"In principle, if you're a central bank and zero wasn't a magic number, that would be great. You could just keep on cutting until you got to your inflation target.
"But I think that the difference in the real world is that people can hold cash at zero and people just inherently don't like the thought of negative interest rates. It just doesn't sit right."
Smyth now sees negative rates in New Zealand as "almost a done deal".
Even if there is no major crisis, the economy appears to be slowing and consistently undershooting RBNZ forecasts.
There's a risk, he says, that negative rates could cause some unintended side-effects, "maybe some behavioural response that standard economic models might not necessarily expect."
Orr accepts that it will be a challenge to get the public comfortable with the concept of low and potentially negative rates, "because it's just not in our living memory".
But he encourages people to look back a bit further: "before the great inflation of the 70s … you had decades of price stability, not even small inflation."
It may take some time, but this is what we are all going to have to get used to.
By way of light reading, Orr points me to a recent paper by prominent US economist Kenneth Rogoff.
Rogoff makes a strong case for holding firm on central bank independence in the face of suggestions that monetary policy is running out of steam
He's clearly been an influence on Orr, who also refuses to concede that monetary policy is weakening just because nominal rates are lower.
What about the idea that negative rates are unfair on savers? Rogoff calls that "naive".
He argues that it wouldn't be hard to exempt small depositors "so only a small percentage of retail depositors are affected".
And he makes the case for savers having more diversified investments (as Orr did after the cuts this month), pointing out that some of those investments will do even better, the lower deposit rates go.
Then there are the macro-economic benefits.
Rogoff highlights the boost that families and workers get from the economic stimulus when rates go negative. That boost should also start to lift longer term rates as the economic outlook improves, he argues.
But this is still esoteric stuff.
When most people hear "negative rates", they extrapolate to the inevitable conclusion: a weird world where you pay the bank to look after your money.
Even weirder: the bank pays you to take theirs.
Places like Japan, Switzerland, Denmark and Europe have had negative rates for a few years now and things haven't got quite that weird yet.
"Retail – household deposit rates – haven't really gone negative. They've kind of been floored at zero," says the BNZ's Smyth.
"If you are an institutional customer, you've probably got a negative interest rate. But for retail savings accounts, they've been floored at zero so there's been a reluctance on the part of the banks to take rates negative for the households."
Denmark has been leading the charge on negative rates. The official cash rate there has been negative since 2012.
Last week a Danish bank made headlines around the world when it offered the world's first negative mortgage rate
But that's not quite as clear-cut as it seems. The Danish mortgage system is different to most.
Mortgages there are a kind of three-way transaction with the bank backing each loan directly to a specific institutional investor.
In theory, the -0.5 per cent rate means that for every $100,000 the homeowner borrows, they pay back only $95,000.
But the structure of the deal means the borrower probably still pays a little more over the full period of the loan in fees and charges.
Only the institutional investor backing the loan takes the full 0.5 per cent hit.
Why would they do that?
Well, because institutions are prepared to pay for certainty.
For big institutions, investment is fundamentally about managing risk by diversifying until likely returns match the appetite of their clients.
A managed fund might put a certain amount of money into high-risk assets: tech start-ups or developing markets.
It puts another chunk into medium-risk assets like mature dividend stocks.
Then it balances the risk with super secure bond investments, so that even if the market crashes there is a predictable floor on potential losses.
In that kind of complex portfolio, where the return on high-risk investments might swing around by double-digit figures, the difference between a positive 1 per cent return or a negative 1 per cent return on a government bond doesn't matter much - as long as it can be relied on.
So how low can they go?
So far, the lowest central bank policy rate implemented overseas is -0.75% in Switzerland.
The BNZ's Smyth believes New Zealand's official cash rate could potentially be cut as low as negative 0.5 per cent before the Reserve Bank would need to employ other more radical tools.
"There will be a point when interest rates are so low that folk hoard cash. At this point lowering interest rates any further loses its effect," he says.
That's the point when the Reserve Bank would need to look at other tools like quantitative easing, targeted term lending or hope for fiscal stimulus from increased government spending.
Brad Olsen, a senior economist at Infometrics, thinks we are already at that point.
The debate about the timing of cuts has become irrelevant , he says.
"Who cares at this point because it's just not doing anything," says Olsen.
"At this point it is not borrowing [being] too expensive that is holding back spending and investment," he says. It's confidence.
"If you are a business, it makes no sense at this point to invest in some big piece of capital if you don't know what the economic outlook is going to be.
"If you're not getting any growth coming through, it's not really worth it.
"We're almost there already in terms of the unconventional monetary policy.
Three unconventional tools
Treasury and the RBNZ have looked at potential monetary policy responses in the event of a fresh financial crisis, highlighting three options:
Also called quantitative easing (QE), this involves the central bank purchasing either government or corporate debt. It would do that by issuing reserves, or "printing money".
This reduces long-term interest rates by signalling the central bank's intention to keep rates low for a long period. And by reducing the supply of the asset purchased, it encourages investors to rebalance towards assets which are riskier or with higher yields.
It was used by the US, Europe, Britain and Japan after the global financial crisis. Treasury concludes that it was effective in lowering long-term rates, boosting economic activity.
But Treasury highlights three problems with QE for the Reserve Bank.
• The New Zealand government debt market is small; large-scale purchases of government bonds would limit liquidity in the market.
• About 60 per cent of NZ government bonds are held overseas, compared to 20–25 per cent for the US and UK. So reducing the yields on New Zealand government bonds might cause investors to purchase other assets outside New Zealand.
This suggests that a large impact would be through depreciation in the exchange rate, rather than increased investment in other domestic assets.
• Asset purchases would mean a big expansion of the Reserve Bank's balance sheet; as much as a five-fold rise in assets. This has fiscal risks, and would expose the Crown to covering any losses in the balance sheet.
Given the low volume of local bonds, the Reserve Bank has also suggested it could purchase foreign government bonds. This would have the effect of selling New Zealand dollars to purchase the foreign assets, increasing the supply of New Zealand dollars.
The faster rate of growth in the monetary base relative to other countries could be expected to put downward pressure on the New Zealand dollar.
The international experience of negative interest rates suggests that while banks remain willing to deposit funds at the central bank when the policy rate is negative, they are reluctant to let retail corporate or household interest rates turn negative, Treasury says.
If retail rates were to fall below zero, it is likely households and businesses would prefer to hold physical currency, increasing the demand for cash and limiting the efficacy of monetary policy.
Assuming the spread between the official cash rate (OCR) and other rates remains constant, this suggests the limit of the OCR, before corporate bond rates reach zero, is between -0.2 per cent and -0.35 per cent.
This would still imply that most market participants would face positive rates. That suggests that while the OCR can be reduced below zero, it's not by much.
Assuming the OCR was at the current level of 1 per cent at the point of the next crisis, the scope to reduce interest rates below zero would allow, at most, only a 1.6 percentage point reduction, compared to the 5.5 percentage point cut during the GFC.
Targeted term lending
This is the least well-known option in the RBNZ toolkit – given the media coverage the other two options have had in the US and Europe.
It is effectively a way for the central bank to cut rates for just the specific areas of the economy it sees as the most important, or most under pressure.
If a financial crisis reduced the pass-on rate on from OCR cuts to consumer and business borrowers, the RBNZ could extend loans to banks at even lower rates, conditional on those rates being passed through to the real economy.
The loans could also be targeted. For example, they might be made available for small business or rural lending only.
Schemes like this have been introduced in Japan, the UK and Eurozone.
Treasury says the evidence is that targeted term lending is less effective than asset purchases but is typically welcomed by financial markets as a way to relieve pressure on the banks.
It is not without risk as the loans would go on the RBNZ balance sheet.