The door to negative interest rates has been opened a little further by the Reserve Bank, and the money market has responded by taking one of its key benchmarks into minus territory for the first time in history.
As expected, the bank yesterday almost doubled its quantitative easing (QE) bond-buying programme to support the Government bond market to a total of $60 billion.
The bank also extended the programme to include inflation-indexed bonds, which was also anticipated.
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Likewise the market kept the Official Cash Rate unchanged at 0.25 per cent and the tenor of Governor Adrian Orr's one-page news release was in line with market expectations.
However minutes from the bank's monetary policy committee attached to the release saw both interest rates and the New Zealand dollar fall sharply.
The minutes said: "The committee noted that a negative Official Cash Rate will become an option in future, although at present financial institutions are not yet operationally ready.
"The current goal of monetary policy tools is to reduce borrowing rates for New Zealanders, and further OCR reductions at this stage would not be effective in achieving that.
"Consequently, the committee reaffirmed its forward guidance that the OCR will remain at 0.25 per cent until early 2021," it said, adding talks with financial institutions about preparing for a negative OCR were ongoing.
The point of taking the OCR — which also acts as an overnight cash rate — into negative territory is to make borrowing costs even lower, thereby giving the economy more stimulus.
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As it stands, borrowing costs for businesses and households are still in the 3, 4 or 5 per cent region.
A negative OCR would take them lower still.
The negative interest rate scenario saw the kiwi get sold off by about 70 basis points to US60.12c.
The 10-year swap rate fell by 7 basis points to 0.63 per cent and the 10-year bond yield dropped by 8 basis points to 0.55 per cent.
The money markets use the NZ dollar Overnight Indexed Swap (OIS) as a key tool, as it is seen as the "cleanest" measure of Reserve Bank OCR expectations.
The OIS rate for March 2021 now sits at zero. Further out, the September 2021 OIS is at minus 0.1 per cent.
"Market pricing has gone negative for the first time in New Zealand's history," Westpac senior markets strategist Imre Speizer said.
Speizer said the message taken from the Reserve Bank was that the door had opened further for negative interest rates.
"Markets are now flirting with the idea of a negative OCR whereas previously they had never done so," he said.
Fisher Funds' head of fixed income, David McLeish, said his sense was that the Reserve Bank wanted to cut the OCR to negative territory yesterday.
"It was really just down to the fact that some institutions were not properly prepared for this, so they were forced to hold," he said.
McLeish said pressure had been mounting for months for the banks to get their systems ready.
"The statement was very clear that the path of least regret was to deliver larger stimulus more quickly," he said.
"That also points to them wanting to go into negative territory with the OCR," McLeish said.
"I think sooner rather than later."