Measuring the effect of negative interest rate on New Zealand banks

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.