Interest rates

Reserve Bank says lower interest rates reduce rather than increase inequality

The Bank's search comes three months after Governor Adrian Orr said it had only played a


The Bank’s research comes three months after Governor Adrian Orr said it had played a “small role” in creating unsustainable house prices.

The Reserve Bank says its own new research shows that lower interest rates reduce wealth inequality, rather than increase it.

He admitted the research had not taken into account the impact a lower official cash rate (OCR) could have on rising asset prices, but said he thought it was “unlikely to be significant” given a small temporary change in monetary conditions.

This is despite a widely held assumption that accommodative monetary policies since the start of the Covid pandemic have primarily benefited owners and stock market investors by driving up asset prices.

The bank’s “analytical note” released on Friday concluded that a 50 basis point reduction in the official exchange rate leads to a fairer distribution of wealth in the economy, in part by reducing interest paid on the saving.

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The Gini coefficient, which is commonly used as a mathematical measure of inequality, fell about 0.5 percentage points over a 15-month period after such a rate cut, according to its modeling “staying consistently lower by the following”.

The research follows comments by Reserve Bank Governor Adrian Orr in November that his own monetary policies had played only a “small role” in creating unsustainable house prices.

The public had rightly questioned the role the bank had played in outcomes such as higher house prices and lower interest on savings, and “whether these are the best outcomes for society. “, did he declare.

The bank acknowledged that the “key missing channel” in its modeling was the effect a drop in OCR would have on asset prices, saying this would be investigated in future research, but appeared to downplay the omission. .

“In the New Zealand context, there has been a sharp rise in house prices over the past 18 months, partly due to falling mortgage interest rates and limited opportunities to spend and invest in because of the pandemic,” he said.

But the bank said that “while this may be an important channel for considering the distribution of wealth, it is unlikely to be important when looking at a small temporary change in monetary conditions.”

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Reserve Bank Governor Adrian Orr expressed concern in August about the situation buyers of recent homes may soon find themselves in, and since then prices have risen rather than fallen.

The omission could “appear as a significant limitation, particularly in light of the substantial increase in house prices we have seen over the past few decades,” the Reserve Bank said.

But he said that might not be as big of a limitation to his model as it first appears, because over the long term interest rates tend to hover around a “ neutral rate” determined by “slow-moving international structural factors” and largely external ones. control of the Reserve Bank.

Even leaving asset prices aside, the Reserve Bank said disentangling the distributive effects of monetary policy from other drivers of lower interest rates and shifts in the distribution of wealth was “not an easy task”.

“Monetary policy affects New Zealanders through a number of channels.

“Some are obvious, like a change in mortgage or deposit rates. Some are less obvious but just as important, such as a reduction in OCR supporting demand in the economy and, in turn, potentially preventing job losses or business failures,” he said. .

The bank said its model indicated that a “surprise” 50 basis point rate cut reduced inequality across the entire population, from the richest to the poorest, when they were divided into five groups based on of their wealth.