Economists are picking the Official Cash Rate (OCR) will drop to negative 0.5 percent before the end of the year, despite the Reserve Bank promising to hold it at 0.25 percent until March 2021.
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In March, the OCR was slashed by 75 basis points, with banks adjusting their floating rates immediately, and some cuts later to other lending and deposit rates.
Westpac chief economist Dominick Stephens said the Reserve Bank would also double its quantitative easing (QE) programme to $60 billion in May, but would be unlikely to up it any more after that.
"So the Reserve Bank will be on track to own about 45 percent of the New Zealand government Bonds on issue. In theory the Reserve Bank could just continue with an even bigger QE programme but based on commentary, we think they would prefer to switch to a negative OCR at that point."
"What will happen is inflation will drop away to a very low level unless the Reserve Bank takes decisive action."
Stephens said the Reserve Bank would likely have some hesitations and facilitate a long lead in to the implementation of a negative rate.
"The Reserve Bank needs to give [banks] enough time to get ready and secondly, they actually committed to keeping the OCR at 0.25 percent for a year on March 16. Now I think most people thought that was a promise not to lift the OCR but technically they promised not to move it."
"I think what they'll do is signal the move ahead of time, perhaps in August but I don't think it will be dropping until November."
Reserve Bank governor Adrian Orr. Photo: RNZ / Dom Thomas
He said a negative OCR would remain for about a year, and while it would incentivise lower retail rates, those would not go into negative.
"Reducing the OCR below zero's a pretty technical feature really. It's an interest rate paid by the Reserve Bank to trading banks.
"It will reduce retail interest rates a bit, but not one-for-one."
Westpac's forecast also predicted the coming recession to be deep, but relatively short.
"We're still expecting a really deep decline in GDP from the second quarter of this year of 16 percent. I do think the country's done well at battling the virus and consequently I'd expect the initial rebound to be a bit more vigourous - plus 13 percent type number for the September quarter."
However, growth beyond the September quarter would be be harder to come by
"You're going to have the legacy of people being unemployed, not spending and that having a second-round effect on shops' revenues.
"Declining house prices might affect behaviour, some businesses might have folded and others might have taken on a lot of debt to help them get through. All of those things mean the recovery could well be slow."
"We're expecting some negative 6 percent annual GDP for 2020 but only positive 4.5 percent for 2021. So we'll still be below the level of economic activity that we went into Covid-19 at, at the end of 2021."
