New analysis by the Reserve Bank has delivered a stark reminder that New Zealand households are older and more reliant on bank deposits than much of the commentary about interest rates suggests.
The era of historically low interest rates - from 2016 to 2020 - delivered just a 0.1 net positive income gain across all New Zealand households, research by Reserve Bank senior economic analyst Gulnara Nolan shows.
On average, mortgage holders experience a 1 per cent increase in income, while non-mortgage holders see a 0.4 per cent reduction in income.
Across the population, the reduction in income due to a lower term deposit rate
exceeded any increase in income from lower mortgage rates for the bottom three
Almost half of those households were in the 65+ age group.
The decline in interest rates also had varying effects across age groups, the analysis showed.
The assumption was that individuals who have retired will tend to have low current income but significant savings, while young individuals may have relatively large savings to income as they are building up a deposit for a house, Nolan said.
This was is supported by the data.
"The winners and losers of interest rate changes vary by age group - with those in their prime earning years (25-54) gaining 0.3 per cent".
The gross income of older workers (55-64) and retirees (65+) declined by 0.1 per cent and by 0.5 per cent respectively.
In order to consider the distributional implications of lower interest rates, micro-data was used to evaluate how a decline in interest rates changed the income or wealth available to households.
The analysis looked at the direct effect of a change in retail interest rates on the
interest income and expense of households (holding all behavioural effects constant).
The report focused on two specific margins of interest - mortgage rates and term deposit rates.
Those channels were considered in isolation, as others such as lower unemployment due to an easing in monetary policy, could work in opposite directions.
"A reduction in both of these interest rates would be beneficial to mortgage holders with small bank deposits as they are net borrowers," Nolan said.
"The interest rate reduction reduces the interest expense they have to pay on their debt, with lower mortgage interest payments leaving more cash in hand for the mortgage holder to spend on other things".
However, a decline also directly reduced the income of households who were net savers in terms of deposit holdings - by reducing the income they receive from their stock of bank deposits.