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Incomes Rise For Mortgage Holders As Interest Rates Fall


The reduction in interest rates since 2016 has increased cash-in-hand for mortgage holders while also reducing income for those who do not have mortgages through lower deposit rates, a Reserve Bank paper shows.

As part of the Bank’s analysis of the distributional effects of monetary policy this research aims to explain part of the savings redistribution transmission channel.

To do so the paper considers a thought experiment where the population in 2016 suddenly finds itself facing the lower retail interest rates that were prevalent in 2020.

Retail interest rates were lower in 2020 than 2016 due to a combination of factors, including lower global interest rates, and cuts in the Official Cash Rate in 2019 and in March 2020 following the COVID-19 virus pandemic.

The change in cash-in-hand for households directly following the fall in interest rates, is termed the cash flow effect of lower interest rates. This captures the price effect of the savings channel, but does not include any change in saving or borrowing that may occur due to lower interest rates.

Applying these new interest rates, the cash-in-hand for mortgage holders is estimated to rise by an average of 1.0%, while those who do not have mortgages experience a 0.4% decline due to lower income from deposit savings.

Low-income mortgage holders are the largest beneficiaries of the reduction in mortgage interest rates, and middle-aged households also see notable benefits. However, older households (those aged 55 and above) tended to see a reduction of their income due to lower interest rates - as these households tend to have smaller mortgages and more significant deposit savings.

Quantifying the change in cash-in-hand for different types of households also provides insights into how much the economy responds to lower interest rates. Highly-indebted lower income households tend to be more willing to spend any income boost, and the reduction in interest rates has increased incomes for this group during this period. This suggests that lower interest rates may have stimulated the economy quite strongly.

This analysis is partial in nature – it does not provide the full picture on the distributional impacts of policy. We need to continue to build up to the bigger picture in order to truly understand the implications of monetary policy and the current low interest rate environment for the distribution of wealth and income.

About the research programme

The Reserve Bank is carrying out a wide range of research about the different ways changes in interest rates could affect the distribution of wealth and income in New Zealand. Each research paper is aimed at giving the bank (and other decision-makers) parts of the jigsaw puzzle, to help our understanding, rather than a complete picture all at once.

The first part of this ongoing research was a recent paper looking at the international evidence:

This paper showed there are winners and losers when interest rates are cut, but the international evidence is not clear that this always means the rich get richer and the poor are worse off.

Over coming months and years, the bank’s researchers will look at different aspects of how lower interest rates may affect different groups in New Zealand. For example, researchers are looking at the impact of monetary policy on New Zealanders’ incomes, and in future will look at the impact on housing wealth.

This research programme may or may not change our overall view of monetary policy- whether rates should be raised or cut and by how much. This distributional research is about the unintended consequences of monetary policy, not about the overall effectiveness of monetary policy in achieving our mandate.

The Reserve Bank’s overarching aim is to promote the prosperity and well-being of all New Zealanders. With monetary policy, our core focus is to support full employment and low and stable inflation.

Monetary policy remains an effective, but blunt, tool to achieve these goals. It is also important that we understand how changes in interest rates affect different groups, regions, and sectors in New Zealand. Understanding these distributional effects can help shine a light on areas where broader government policies might be able to help reduce the unintended consequences of monetary policy.


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