Lower interest rates, more money printing; Reserve Bank considers ageing population response

The Reserve Bank, led by acting Governor Christian Hawkesby, is considering how its policy making will need to evolve as the population ages. Photo / Mark Mitchell

The Reserve Bank says New Zealand’s ageing population could put downward pressure on interest rates over the next decade.

Because older people save more than younger people, there might be proportionately less demand for debt, goods and services in the future. All things equal, this could suppress inflation.

So, in the event of a downturn, the Reserve Bank of New Zealand (RBNZ) might need to cut interest rates more aggressively than would otherwise be the case to spur economic demand and lift inflation.

This could increase the prices of houses, equities and other assets.

The Bank of Japan has for many years been the poster boy for using very loose monetary policy to respond to the economic challenges associated with an ageing population.

Indeed, the RBNZ says if it can’t stimulate the economy enough with a low Official Cash Rate (OCR), it might need to print money, like it did during the Covid-19 pandemic.

The RBNZ’s Enzo Cassino and Anoushka Divekar discuss the possible impacts of an ageing population in a chapter of the bank’s biannual Financial Stability Report, released before the full report is published on November 5.

The RBNZ is thinking about how the country’s changing demography could affect price and financial stability. Treasury is similarly modelling the cost to the Crown of an ageing population, while Inland Revenue is considering how taxes could be hiked if required.

The RBNZ notes an ageing population might lower the rate at which the OCR is considered “neutral” – neither expansionary nor contractionary. However, it says there is “considerable uncertainty” around this.

The RBNZ also makes the point an ageing population could affect the way interest rate changes flow through the economy.

For example, if a larger portion of the population is comprised of elderly people with savings rather than debt, a larger portion might not tighten their belts if the RBNZ lifts interest rates to try to cool economic demand to curb inflation.

The RBNZ says an ageing population could increase the portion of investments in bank deposits and conservative assets. This could lower demand for higher-risk assets like equities.

On the other hand, low interest rates could prompt people to make riskier investments in a bid to get higher returns.

The RBNZ notes older Japanese people have done this by borrowing yen at low interest rates and investing in foreign currencies that pay higher interest rates to make a profit from the difference.

The RBNZ has also considered the impact of an ageing population on the Government’s ability bolster the economy during a time of crisis.

If high healthcare and superannuation costs put the Government’s books under too much pressure, it might rely more on the RBNZ to use low interest rates to support the economy.

Because the RBNZ regulates deposit-takers and insurers, it has considered the impact an ageing population could have on them.

If banks see a lift in deposits, they will not have to rely as much on investors for funding. And if they see mortgage growth slow, they might need to start looking at other ways of drumming up business.

As for insurers, the RBNZ believes there will be higher demand for health insurance and lower demand for life insurance.

It concludes that while an ageing population may create risks, any vulnerabilities will likely develop slowly. So, it can prepare and change the way it regulates financial institutions if it needs to.

Jenée Tibshraeny is the Herald‘s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.