Central bank finds that lower rates are better for an equal society, with higher rates benefiting the already wealthy
The Reserve Bank of New Zealand (RBNZ) has drawn a direct line between a low cash rate and wealth equality, releasing an analytical note that deep-dived the macroeconomic impacts of interest rate rises.
The RBNZ considered the relationship between access to finance, which is improved by lower interest rates, and cash savings in accounts, which is aided by higher interest rates.
“There has been increased interest from the public and Government on the distributional impacts of monetary policy,” they wrote.
“Nominal interest rates have, on average, declined over the past few decades. This has seen interest rates fall to very low levels, and they have played a substantial role in boosting asset prices, including house prices.
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“At the same time, low interest rates have meant lower returns to savings for many New Zealanders.
“Given that monetary policy is primarily implemented through changing interest rates (or improving credit availability through alternative monetary policy instruments), the public has rightly questioned the role the Bank has played in these outcomes, and whether these are the best outcomes for society.”
The central bank focused on the Gini coefficient, a measure of economic inequality in which 0 is totally equal and 1 is maximally unequal.
The RBNZ found that a cut of 50-basis points from the cash rate resulted in a significant drop in inequality, as measured by the Gini coefficient.
“We find that a 50-basis point reduction in the OCR leads to a drop in wealth inequality (the Gini coefficient) by approximately 0.5 percentage points,” they wrote in conclusion.
“This drop, which means wealth is more equally distributed, occurs gradually and reaches its largest after five quarters. Although the magnitude declines through time, wealth inequality remains persistently lower thereafter.
“This reduction in inequality is primarily due to a reduction in interest payments received in
the top quintiles (the interest rate channel).
“This fall in the income from savings is accompanied by a reduction in firm profits and an increase in consumption by all households, apart from those in the top quintile.
“This larger proportional reduction in income for the top three quintiles exceeds any reduction in spending behaviour by this group, leading to a net negative relative savings rate - with this effect being strongest for the wealthiest.
“It’s important to note that while the revision to the policy rate temporarily adjusts the relative share of wealth held by each quintile of the distribution, the overall effect of the cut is to support economic activity by making current consumption more attractive for the majority of households.
“Indeed, while interest payments decline, net income from other sources (wages, transfers, and firm profits) is positive for all quintiles.”
