Report also estimates impact on people without mortgage
As interest rates fall in New Zealand, mortgage holders are expected to experience a rise in cash-in-hand. Meanwhile, those without a mortgage could be in trouble as they would most likely experience a reduction in income, according to the Reserve Bank of New Zealand (RBNZ).
The RBNZ’s latest report on household cash flow aims to explain part of the savings redistribution transmission channel in New Zealand. It created a thought experiment where the population in 2016 suddenly faced the lower retail interest rates prevalent in 2020.
Applying the new interest rates, the report estimated that the cash-in-hand for mortgage holders in New Zealand would increase by an average of 1.0%. By contrast, those without a mortgage would most likely experience a 0.4% decline due to lower income from deposit savings.
The report stated that low-income mortgage holders are the largest beneficiaries of a drop in mortgage interest rates, and middle-aged households could also see notable benefits.
However, older households (aged 55 and above) would most likely see reduced income due to lower interest rates as they usually have smaller mortgages and more significant deposit savings.
Read more: RBNZ releases latest data on borrowing activity
The RBNZ’s latest report also provided insight into how much the economy responds to lower interest rates. It stated that highly-indebted lower-income households tend to be more willing to spend any income boost, with the reduction in interest rates increasing incomes for this group during this period.
“This suggests that lower interest rates may have stimulated the economy quite strongly,” the RBNZ researchers said in the report.
However, the RBNZ researchers clarified that their analysis does not provide the full picture of 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,” they said.
The RBNZ researchers will look at how lower interest rates may affect different groups in New Zealand, including looking at the impact of monetary policy on Kiwis’ incomes and housing wealth.
