Negative interest rates - all our Christmas's coming at once or the sign of something more sinister afoot?
Negative interest rates – Are all our Christmas’s arriving at once, or is this a sign of something more sinister to come? What’s a negative yield curve and why as an investor, should I even care?
So let’s define a couple things:
What’s the OCR: Official cash rate? In short, it’s the ‘official’ interest rate set by the RNBZ (Reserve Bank of NZ) to help influence the interest rate, and exchange rate, in an attempt to regulate inflation, and foster stability in employment. When things are going really well in an economy, the OCR increases, and when things aren’t going so well, it decreases. The way that this works is not too simple, but check this out https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/what-is-the-official-cash-rate. We’ve recently seen a big decrease in the OCR and most economists currently agree, we’re going to see another cut again soon.
What is the CPI? The consumer price index – well, it’s the measurement the RBNZ looks at when it sets the OCR. If it’s high, that means that inflation is high, and therefore the OCR needs to increase. Currently the CPI is very low at 1.7% at the time of recording – it’s important to note that the CPI measures the price for a* ‘basket of goods’* – there’s a lot of things not included in the basket – the cost of your mortgage for example, is not directly included in the CPI. https://www.stats.govt.nz/indicators/consumers-price-index-cpi
What’s quantitative easing or QE? Sometimes this is loosely referred to as ‘money printing’ – The US for example, has, since the GFC or global financial crisis of 2008 been printing money big time. Quantitative easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to increase the money supply and encourage lending and investment. https://www.investopedia.com/terms/q/quantitative-easing.asp
What is helicopter money? A Helicopter drop, a term coined by Milton Friedman, refers to a last resort type of monetary stimulus strategy to spur inflation and economic output. Though it would appear to be theoretically feasible, from a practical standpoint, it is considered to be a hypothetical, unconventional monetary policy tool whose implementation is highly improbable. Again, check out this link https://www.investopedia.com/terms/h/helicopter-drop.asp - whilst unconventional and theoretical, I personally wouldn’t be surprised if we see this in our lifetimes.
What’s an inverted yield curve? An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality. This type of yield curve is the rarest of the three main curve types and is considered to be a predictor of economic recession. https://www.investopedia.com/terms/i/invertedyieldcurve.asp. The yield curve is currently inverted.
Today we’re going to have a discussion around these things and we’ll be zooming out a little bit and having a look at the wider international scene to discuss how central banks around the world seem to be dancing to the same tune at the moment.
Often when you hear about topics like this the eyeballs get a bit donut-glazed, but Jeremy makes this pretty easy to understand and I think we covered enough of the basics today to leave no one behind and enough depth to provide some protein for even the more seasoned thinker in this space – I hope you enjoy.
Thanks for listening in to this episode and thanks again to **Jeremy Couchman **– senior economist at Kiwibank.