Indeed. However, the goal of the policy isn’t to change nominal interest rates – it is to increase the quantity of money in circulation thereby reducing real interest rates. By getting banks to buy bonds, the RBNZ is increasing the quantity of money in the economy.

If we need to “create inflation” in the economy this is one way to do it. However, the external funding issue is still very important – as if we look like we are trying to hyper-inflate ourselves out of debt they will ditch us. Even so – if the negative OCR is just an attempt to achieve the RBNZ’s explicit mandate to have a 2% rate of inflation I don’t think we would face this – and as a result, it is just a method the RBNZ can use to credibly achieve its mandate.

Nominal interest rates will definitely stay positive – it is impossible to make them negative. However, this isn’t the goal …

I agree that in New Zealand’s situation we don’t want to go down this path right now. In the situation where we don’t have a credit constraint (which we don’t) the primary purpose of a negative OCR is just to increase the quantity of money in circulation.

With no additional lending (which I don’t think is a give-in) banks could still buy bonds to reduce “reserve holdings”. In this case a negative OCR would merely push banks to borrow off the RBNZ to buy bonds – which is equivalent to quantitative easing.

If we hit an OCR below 1% – which is a tail situation – we need to think about exactly how we can use monetary policy to stimulate the economy. A negative OCR is more appealing to me than straight quantitative easing as it is likely to end up with at least some additional lending.

“NZ banks have a liability problem: they’re willing to lend, but are struggling to find the funding for it”

Indeed – which is why nominal interest rates can be held up even as the OCR falls. There is nothing we can really do about that – but at least by printing money (which is what a negative OCR is) and showing that we mean business when it comes to a stable rate of inflation we can prevent deflation.

Of course, with M3 growing at over 10%pa I don’t see much risk of deflation – but it is still something worth keeping in the back of our minds.

Note that this is also not something I would be keen on if the rest of the world isn’t doing it – as it would impact on our ability to get international funding. But the fact is that a lot of the rest of the world is in a situation where they are looking at quantitative easing – and so it is at least something we should analyse a little.

“RBNZ might be happy to lend at negative interest rates, but depositors and wholesale lenders certainly won’t be”

Nominal interest rates cannot be zero – agreed. But this isn’t the purpose of a negative OCR. Fundamentally it is one way of increasing the quantity of money when nominal interest rates are close to zero – that is the purpose of the policy. It is just like quantitative easing – but instead of having governments buying bonds we have banks either buying bonds or lending out some value of their reserves/money they are borrowing from the RBNZ.

NZ banks have a liability problem: they’re willing to lend, but are struggling to find the funding for it. If the RBNZ starts paying banks to borrow, they can expect to end up funding the entire banking system through what is ostensibly a liquidity facility – the RBNZ might be happy to lend at negative interest rates, but depositors and wholesale lenders certainly won’t be.

In a normal situation yes – but the purpose of a negative OCR is to work in a pretty exceptional situation.

I would also note that a negative OCR implies that the RBNZ will PAY banks to borrow – so that can be used for interbank balances if needs be.

By the way, the RBNZ already charges (or pays a lower interest rate) on what they estimate to be “excess” reserves.

A shortage of cash you say – in what way? If cash is sitting in reserves there is a “shortage of cash” for transactions – which is exacerbated by the money multiplier. A negative OCR just provides a disincentive for holding reserves.

Currently I agree we have no need of a negative OCR – but that doesn’t mean there isn’t potential for such a situation.

The hard thing is identifying “reserves” – as there is no way in hell that banks will hold much in RBNZ accounts if they are getting pinged on it.