Incomes rise for New Zealand mortgage holders as interest rates fall

WELLINGTON, July 27 (Xinhua) -- The reduction in interest rates since 2016 has increased cash-in-hand for mortgage holders while also reducing income for those who do not have mortgages through lower deposit rates, according to a paper by New Zealand's central bank on Tuesday.

As part of the Reserve Bank of New Zealand's analysis of the distributional effects of monetary policy this research aims to explain part of the savings redistribution transmission channel.

To do so the paper considers a thought experiment where the population in 2016 suddenly finds itself facing the lower retail interest rates that were prevalent in 2020.

Retail interest rates were lower in 2020 than 2016 due to a combination of factors, including lower global interest rates, and cuts in the Official Cash Rate in 2019 and in March 2020 following the COVID-19 virus pandemic. The Reserve Bank has kept its official cash rate at a record low 0.25 percent on hold as an emergency stimulus to the economy.

The change in cash-in-hand for households directly following the fall in interest rates, is termed the cash flow effect of lower interest rates. This captures the price effect of the savings channel, but does not include any change in saving or borrowing that may occur due to lower interest rates.

Applying these new interest rates, the cash-in-hand for mortgage holders is estimated to rise by an average of 1.0 percent, while those who do not have mortgages experience a 0.4 percent decline due to lower income from deposit savings.

Low-income mortgage holders are the largest beneficiaries of the reduction in mortgage interest rates, and middle-aged households also see notable benefits. However, older households (those aged 55 and above) tended to see a reduction of their income due to lower interest rates - as these households tend to have smaller mortgages and more significant deposit savings.

Quantifying the change in cash-in-hand for different types of households also provides insights into how much the economy responds to lower interest rates. Highly-indebted lower income households tend to be more willing to spend any income boost, and the reduction in interest rates has increased incomes for this group during this period. This suggests that lower interest rates may have stimulated the economy quite strongly.