Measuring the effect of negative interest rate on New Zealand banks

Weshah Razzak

SN Business & Economics, 2021, vol. 1, issue 3, 1-23

Abstract: Abstract We derive an equilibrium lending and deposit rates from a constrained profit optimization model, and estimated 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 2020–2024. 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% relative to baseline projections over the period Sep 2020 to Dec 2024. However, that increase of bank profit is associated with more uncertainty.

Keywords: Lending rate; Deposit rate; Bank profit; Negative interest rate (search for similar items in EconPapers)
JEL-codes: C15 C51 G21 (search for similar items in EconPapers)
Date: 2021
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Working Paper: Measuring the Effect of Negative Interest Rate on New Zealand Banks (2020)
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DOI: 10.1007/s43546-020-00038-1

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