RAYNER We would be considering the ability of negative interest rates to stimulate economic activity and return inflation and unemployment to our stated policy objectives. We have signalled that it is a tool we are considering but it is among a suite of tools we have at our disposal.

We have found the ability to implement negative rates requires banks to be operationally prepared. We sent a letter to banks to ensure they are ready to implement negative rates if the Monetary Policy Committee (MPC) decides to use this tool.

We are doing work internally to assess the relative effectiveness of various tools and, depending on the economic outlook, the MPC will look at the best way to respond.

AUSTIN When contemplating a negative cash rate one should not lose sight of the fact that there are domestic funds that are required to hold domestic securities and bank balance sheets that need to hold liquid assets. These investors will not go away.

They could move further out along the yield curve to get a higher return. One would also expect these investors potentially to move slightly down the credit spectrum to increase returns.

The other dynamic at play is that high-grade issuance is growing sharply in an environment where corporate issuance has slowed. The changing composition of the local composite fixed-income index means some investors are compelled to rebalance into high-grade from corporate debt, which should also support high-grade issuance even in a negative cash-rate environment.

For offshore investors, it would become a question of relative value. This all hangs on where New Zealand bonds sit relative to offshore bonds.

CARTER The fact that the RBNZ has mentioned the possibility of using this tool has cemented the lower-for-longer rates expectation with investors. COVID-19 is a new paradigm and will likely result in even lower yields for government and corporate bonds in the medium term, and a hunt for any yield.

SPEIZER The Westpac view has been that New Zealand will see a lower – negative – official cash rate early next year. We are in a small minority of analysts calling this, though, and there is a long way to go before we are at that point.

If we do get there and other central banks do not move, the risk is that the yield spread could ripple along the curve and affect appetite for longer-term New Zealand government bonds.

We would not entirely rule out the possibility of the Reserve Bank of Australia, US Federal Reserve and other central banks also having to go down this route if things become dire enough, though.