The OCR is going down – some strange behaviours may be on the way.
Interest rates have been trending down since the 1980s. We are now approaching zero, and some countries are already there.
The Reserve Bank cut the Official Cash Rate (OCR) today to one percent. This pushes it to the lowest level in history, and there may be further cuts to come. But what does this even mean for you and me?
The OCR is the rate that banks can borrow from the Reserve Bank. When the OCR goes down, interest rates for New Zealanders also go down, making mortgage payments cheaper, but reducing interest from savings. The purpose is to encourage spending, and provide a much needed boost to the economy.
When we get to below zero percent interest, putting money under the mattress will be more cost-effective than a savings account. When borrowing is also less than zero percent, the bank pays you to borrow and store the funds under your mattress. Surely, this cannot bode well for the world economy.
For wealthy Europeans, UBS savings accounts currently provide a 0.00 percent interest rate with deposit charges for “higher amounts”. If rates continue to fall, personal vaults may become more common, while the average European mattress may also grow a size or two.
What this means for financial institutions
Europe has had negative interest rates since June 2014, when the European Central Bank (ECB) first set a negative deposit rate of -0.1 percent. In March 2016 it was reduced further to -0.4 percent, with another reduction expected later this year. This means banks need to pay the ECB to hold their money overnight.
Banks lend money, so one would expect that with the boost injected by low interest rates, banks would love the expanding debt levels. In New Zealand, this has been the case for years, but for some banks in Europe, where rates are already getting into negative territory, this isn’t the case.
Deutsche Bank is one example of a European institution struggling under the low interest environment. Since 2011, the then $55 billion dollar (USD) company lost more than two thirds of its value, now just $16 billion with continued job cuts.
With further cuts to interest rates on the way, and financial storm clouds looking ominous on the horizon, this could just be the beginning.