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Measuring the Effect of Negative Interest Rate on New Zealand Banks

Author

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  • Weshah Razzak

    (School of Economics and Finance, Massey University, Palmerston North)

Abstract

We derive an equilibrium lending and deposit rates from a constrained profit optimization model, and estimate them over the period from 1999 to 2020. Then, dynamic stochastic baseline projections of these equilibrium rates and bank profit, and their projections under a counterfactual scenario of a negative interest rate, were produced for the period 2020 to 2024. The model predicts that a negative Official Cash Rate (OCR) lowers the lending and deposit rates on average over the period Jun 2020 to Dec 2024; but the lending rate is higher than the deposit rate. It also increases the volatility of these rates relative to baseline projections. Negative OCR increases both incomes and costs; however, bank profit increases on average, by about 19 percent relative to baseline projections over the period Sep 2020 to Dec 2024. However, that increase of bank profit is associated with more uncertainty.

Suggested Citation

  • Weshah Razzak, 2020. "Measuring the Effect of Negative Interest Rate on New Zealand Banks," Discussion Papers 2008, School of Economics and Finance, Massey University, New Zealand.
    • Handle: RePEc:mas:dpaper:2008
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    File URL: https://econfin.massey.ac.nz/school/publications/discuss/2020/DP2008.pdf
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    JEL classification:

    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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