Ageing population will push interest rates lower, RBNZ says

Economy / news

An aging population may put downward pressure on neutral interest rates and increase the risk that central banks will have to intervene during economic shocks

15th Jul 25, 9:56am by Dan Brunskill

Image sourced from Shutterstock.com

New Zealand’s aging population will put downward pressure on neutral interest rates over the next ten years as low-risk savings balances grow.

A briefing paper published by the Reserve Bank on Tuesday examined the possible impacts of an aging population on financial stability. It said nearly a quarter of NZ’s population was expected to be aged 65 or older by 2050.

This demographic change would likely lead to a higher overall savings rate, lower neutral interest rates, less demand for risk assets, and more constrained fiscal policy.

“An older population has contributed to lower neutral interest rates in recent decades and is expected to continue putting downward pressure on interest rates in the near term. Other factors could offset this impact, making projections of the neutral interest rate uncertain,” the note said.

“Lower interest rates could increase prices of assets such as housing and equities, but lower risk appetite of older investors may increase demand for less risky assets. The types of houses in demand could change”.

The effects are expected to play out gradually over several decades and could make the financial system more vulnerable if not managed appropriately.

RBNZ said the impact of an older population on interest rates was uncertain beyond the next decade, as retirees may begin to run down their savings reserves and push the neutral rate higher.

“If the neutral rate does decline, this may make it harder to provide enough stimulus through OCR cuts in situations where expansionary monetary policy is necessary. As a result, the probability of having to use non-traditional monetary policy tools, such as large-scale asset purchases, in a business cycle may increase”.

Constraints on fiscal policy will add to this risk. Longer life spans means more spending on pensions and healthcare which will limit how much money is available to respond to economic shocks.

Treasury estimates health expenditure will grow from about 7% of GDP in 2021 to over 10% by 2061, while superannuation costs rise from 5% to 7.7%.

This will be partly funded by withdrawals from the NZ Super Fund but most from tax revenue, which itself will decline with a smaller proportion of the population in the labour force.

“As a result, there is a risk that the government’s ability to support economic activity with fiscal policy may be more constrained in response to an adverse shock, such as the COVID-19 pandemic. Reducing this policy responsiveness could increase risks to macroeconomic stability or require more stabilisation from monetary policy actions,” the RBNZ said.

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33 Comments

by Keynes | 15th Jul 25, 10:17am 1752531435

"And increase the risk that central banks will have to intervene during economic shocks" - as though this is something central banks never do? This is exactly what we have a central bank for. That is their purpose and reason for being. It is what they do all the time. It isn't out of the ordinary.

The level of economic illiteracy in NZ is actually frightening - the historic economic data proves that NZ and nearly every advanced economy in the world can handle economic shocks with relative ease using the monetary and fiscal tools available.

The continuous and relentless fiscal fear mongering is wrong and leading the NZ economy into some dark and unnecessarily austere places. For no particular end or purpose and based on completely false assumptions about macro-economics in the real world.

by Averageman | 15th Jul 25, 11:14am 1752534854

A model were the risky gambler can never be allowed to fail, especially if the financial system has outgrown its host and is gambling via extended leverage products. As a result excessive risk taking is rewarded at the expense of public bail outs.

Surely a change in this model to allow failure in the banking and financial product sector would behave better.

by Keynes | 15th Jul 25, 11:39am 1752536388

No - it doesn't behave better which is why modern economies have central banks. Look at inflation and growth data for the 1800's - it was completely erratic and included deflation. Deflation is much worse than inflation for economies.

by Phoenix (FKA JC) | 15th Jul 25, 1:38pm 1752543485

Deflation is much worse than inflation for economies.

It's a difficult issue to debate rationally for Anglosphereans.

However, if we use Japan as an example, was deflation necessarily a bad thing? If incomes are not rising, surely you don't want the cost of living and goods / services to rise.

Also, Japan's industrial structure had to become more fragmented and more cut-throat competitive, while the Anglsophere industrial structure has been consolidated and has de-facto become more oligopolistic or oligopsonistic.

The net result is significantly lower price power for suppliers of goods and services in Japan relative to the Anglosphere. No matter how differentiated a product or service you offer in Japan, within days or weeks, a competitor will follow suit offering something similar but at a lower price point.

by Independent_Observer | 15th Jul 25, 1:32pm 1752543158

Deflation is bad...

Haha only if you have too much debt (because you go bankrupt very quickly).

But if you have cash and want to buy things at a cheaper price it is a wonderful thing.

by Phoenix (FKA JC) | 15th Jul 25, 1:44pm 1752543851

So you're saying deflation is bad for assets such as stocks, property, etc. I understand that businesses generally need prices to be stable.

But the problem here is that the cost of land impacts all businesses, from manufacturing to retail to logistics.

This is the tradeoff with the 'Ponzi must grow onwards and upwards' mission that the central bankers, ruling elite, and much of the hoi polloi prescribe to.

by Independent_Observer | 15th Jul 25, 1:56pm 1752544615

Yes but if you have savings, want to start a business and the land is getting cheaper (via deflation) it is a great thing. Opportunities everywhere to invest.

If you have excessive debt and are trying to run a business and deflation appears, then its not a great thing as the cost of the debt becomes unbearable and your cash flows no longer cover your costs = bankruptcy.

We've decided we want to run an economy high on private debt vs GDP which isn't an intelligent thing to do. It risks long term economic stagnation and risk of a large bust.

We have run the economy from the perspective that he that already owns (via debt) has the power in society, not the person who has the savings. But it is savings that drives fresh investment - something most people in the present day have completely forgotten. Savers in a healthy economy should have significant sway in the economy - not those drowning in debt (and the last 10+ years its been those drowning in debt who think they have all the power - e.g. calling savers 'doom gloom merchants' and so on and so forth).

by Phoenix (FKA JC) | 15th Jul 25, 2:16pm 1752545816

OK. But let's not forget Werner's Qty Theory of Credit:

1. Credit for Productive Investment:

Leads to sustainable economic growth without causing inflation.

2. Credit for Consumption:

Increases aggregate demand, which can cause inflation if not matched by supply.

3. Credit for Financial Transactions:

Drives up asset prices, potentially creating bubbles and leading to financial instability, but does not stimulate real economic growth

So shouldn't have allocating more credit creation to 1 been in the mix?

by Averageman | 15th Jul 25, 2:49pm 1752547789

We've decided we want to run an economy high on private debt vs GDP which isn't an intelligent thing to do. It risks long term economic stagnation and risk of a large bust.

100% agree. Isn't it time to let the those that are bankrupt actually become bankrupt, or do we continue to socialise their gambling habit across the rest of NZ thru inflation?

by Colin Maxwell | 15th Jul 25, 10:46pm 1752576399

Keynes, you said ..."Deflation is much worse than inflation for economies."

Good god - is this statement from a reincarnation of John Maynard himself?

Bad for what?

In a healthy, productive economy, moderate deflation driven by technological advancements or efficiency gains can be beneficial by increasing purchasing power, encouraging savings, and promoting efficient resource allocation.

In fact, in that scenario, within an industrial capitalist model based on sound money created as a public utility, mild deflation would be the natural order of things.

In this situation, deflation can result from increased productivity, plus technological advances, and an economy can sustain very high central bank interest rates, while all of this translates into healthy real yields for savers.

This incentivises the societal savings habit where people are quite comfortable with having large deposit accounts at local banks, as the value of their money increases over time.

This is capital that can then be lent out in a fractional reserve model, under robust moral hazard and oversight discipline, creating liquidity in local communities for business and entrepreneurial activities, plus housing, etc, at very moderate rates.

This is why the Keynesian and orthodox central banking models are a complete crock - interest rates are positively correlated with nominal GDP growth - an entire raft of empirical evidence proves that lowering rates does not necessarily stimulate growth and can in itself contribute to deflationary stagnation/stagflation.

I won't dwell on this, as Averageman, Phoenix, and Independent_Observer have already covered this subject extremely well.



At the central bank level, the money creation conducted as a public utility provides billions of dollars of income into the treasury revenue account - funds that would otherwise have to be collected in the form of taxes.

In the PBS (Public Banking Solution) there are no longer any third-party privately owned banking cartels siphoning off this capital and liquidity.

Cheers to all

Col

by Colin Maxwell | 15th Jul 25, 6:15pm 1752560112

Keynes, you said...

"The level of economic illiteracy in NZ is actually frightening - the historic economic data proves that NZ and nearly every advanced economy in the world can handle economic shocks with relative ease using the monetary and fiscal tools available."

Spoken like a true cheerleader for the Western-centric status quo heavily financialised economies, and the pump and dump playbook of the global central banking industry - the head of the human food chain. Your Keynes label could hardly be more apt.

Yes, I agree with the bolded statement - but, is this not a classic case of the pot calling the kettle black?

The "historic economic data" you reference does not factor in our current extraordinary levels of debt, because it is historic.

This is not just public debt, but total debt in all of the Western casino Ponzi economies and now the massive addition of unfunded liabilities too. In the 80s, interest rates in the US spiked to 20%, with 10-year treasuries peaking in 1981 at 15.84% driven by very aggressive monetary tightening

UK 10-year Gilts peaked at close to 16% too, and in NZ our 10-year yields in 1984-1986 peaked at 14-16%. How long would our economies last if these risk-weighted yield hikes occur now? These economies would tank. There are no friendly buyers waiting in the wings to rescue the West from this self-inflicted debacle. The US economy would founder before yields even got to 6%, let alone 16%,

Neither does it account for the risk involved in buying anything other than short-dated treasury bonds when all of the currencies they are based on have lost more than 98% of their purchasing power.

These fiat-based assets pose enormous counterparty risk, as well as capital losses at redemption, plus yield carnage if you factor in the real inflation rate instead of the nonsensical inflation/CPI figures we are supposed to treat as gospel.

Debt levels in those days were only a fraction of what they are now, yet there was still carnage - imagine what would happen now in our extraordinarily indebted economies? We have gone too far - we cannot inflate our way out of those debts - this leaves only hyperinflation or default, both of which are also ruinous for the real economy of a country.

For a Govt to finance most of its debt in short-duration treasuries as stop-gap measure, this means that debt has to be rolled over much sooner and in a yield spike, this can be disastrous - so too for owners of medium and long-dated bonds, these could become practically unsaleable - with holders forced to hold to maturity where hyperinflation could leave them with their capital worth only pennies on the pound.

These are sovereign debt-trap scenarios where a country can never pay down its debt, and even rolling it over forces them into a spiralling situation where they simply will not find enough overseas buyers of their debt or their currency.

This has all been in the pipeline since 2014, when the global central banks became aggregate net sellers of treasury debt.

China's peak holding of US Ts was ~$2 trillion - they are now down around 25% of their peak - `$750 billion - recently replaced by the UK as the second largest holder, behind Japan, who is hinting that the prospect of selling down their holdings is definitely on the table too.

And so here we are, the US and UK, two of the most hopelessly indebted nations on the planet, cuddling up together and recklessly buying one another's debt using freshly created money - what could go wrong?

IMO your last paragraph is a real eye opener too ... "false assumptions about macro-economics in the real world."

I would suggest that the "illiteracy" that you refer to is much closer to the mark than your approach, in which you advocate for the worship of central banks, plus treating a debilitating sovereign debt spiral and an increasingly unproductive financialised economy with - wait for it - EVEN MORE DEBT.

by Keynes | 16th Jul 25, 3:46pm 1752637604

Government bonds are not 'debt'. The private sector uses bonds as a safe harbor savings asset - it is the baseline of any investment portfolio. The collective 'debt' you are referring to is surplus currency in the private sector that is being saved with governments.

The risk of too much bond issuance is the potential return of the savings into circulation at some point in time and this is an inflation risk. Not an unpayable debt risk - the government creates money to meet its obligation it doesn't rely on taxes.

Government bonds can make room for more government spending because bonds (savings) remove money from circulation. Government spending is to key economic growth which generates higher tax revenue.

by Independent_Observer | 15th Jul 25, 10:25am 1752531957

My contrarian theory is that the ratio of older/retired persons with cash compared to the working age population will result in a rise in inflation and interest rates. ie the opposite of the theory of this article. Why?

The larger retired group with cash demand more goods and services to be produced by the current working age population (or they still demand the same amount of goods and services but they themselves (all these new retirees) are no longer producers, but only consumers - thus demand for goods and services outstrips supply. When demand increases for a relatively stable output of production, the general result is a rise in prices (e.g. in labour and sales prices). Producers have the power to raise prices because of the excess demand.

The rise in prices across goods and services = rising inflation = rising interest rates to keep CPI in the 1-3% band.

by Phoenix (FKA JC) | 15th Jul 25, 1:45pm 1752543923

My contrarian theory is that the ratio of older/retired persons with cash compared to the working age population will result in a rise in inflation and interest rates.

Interesting view. But my reckon is that the number of retirees with any meaningful savings is shrinking, not increasing. That is not accounting for all the money expansion in the housing sector that is being considered as the de facto savings.

by Independent_Observer | 15th Jul 25, 1:37pm 1752543469

There are many I've been dealing with/talking to who have $500K + of savings. When they were getting 5% returns on TD's recently they were receiving approx additional yearly income of $25K a year on top of superannuation. The super was covering their living costs, the additional $25K + a year was a bonus.

Raising rates gave them more optimism to spend in the economy. Dropping rates causes them to close their wallets again. ie the opposite of the theory that dropping interest rates stimulates the economy. On a net basis (compared to the mortgage relief experienced by those with large debts) I'm not sure how true the 'dropping rates stimulates the economy' really is when you have a large cohort entering retirement with significant savings.

by Keynes | 15th Jul 25, 11:59am 1752537591

It's as though every economic commentator and researcher in NZ is obsessed with finding good sound reasons for weakening and under-investing in our economy at every opportunity. So far they've been very successful but the ignorance and self-destructive outcomes are breathtaking.

The above article is a classic example - speculate about events 50 years into the future and damage the present economy as much as possible in response.

by interesting1234 | 15th Jul 25, 12:05pm 1752537918

speculate about events 50 years into the future and damage the present economy as much as possible in response.

Like having high tax rates post WWII to prevent accumulation of wealth at the top few percent, and assist in justifying govt expenditure on core infrastructure like the hydro dams down south for the betterment of everyone in the country? It seemed to work out for those 50+ years for the growing country didn't it?

by Keynes | 15th Jul 25, 11:59am 1752537567

"As a result, the probability of having to use non-traditional monetary policy tools, such as large-scale asset purchases, in a business cycle may increase." And .... Maintaining market stability and under pinning the private sector surely leads to a better outcome than not using 'non-traditional monetary policy tools'?

I don't get it - what is the alternative? We just allow the private sector to collapse? Why bother having a central bank - should we go back to the economics of the 1800's?

by Independent_Observer | 15th Jul 25, 10:49am 1752533346

I've come to realise when anyone in power uses terms like 'market stability' they really mean 'we are going to create significant market instability via our actions'.

Its like George Orwell 1984. eg the Ministry of Truth stuff. What they do is the opposite of what either their name is or what their mandate is. E.g. for RBNZ to promote market stability..all they do is create market instability (by getting inflation forecasts wrong and excessively raising or lowering interest rates) - if they did nothing and keep interest rates stable, we would have had far more market stability in recent times.

by Keynes | 15th Jul 25, 11:09am 1752534555

No. The RBNZ does not create instability. Yes - they don't get it 100% right on everything. However, what would the economy look like if the RBNZ didn't take the actions it does?

In combination with fiscal policy (government spending) the economy can be protected from major private sector failures (the Great Depression in the 30's, the GFC in 2008) or unexpected natural disasters (the ChCh earthquakes and COVID).

In every case it is the government and the reserve bank that step in to save the private sector from complete collapse. The private sector is not capable of protecting itself which is why we have a reserve bank.

by Averageman | 15th Jul 25, 11:20am 1752535258

The private sector operating in a non sustainable fashion are allowed to fail every day in NZ. Why should behavior using over financialization and speculation be allowed to fail? The risky gambler rolling double "one" at the dice table (snake eyes) should be allowed to fail just like they do in a Casino.

NZ we have plenty of food, electricity, and shelter (check the vacant housing numbers). We will be ok.

by Keynes | 15th Jul 25, 11:53am 1752537214

Yes - at the micro-economic level there are plenty of business and speculations that fail right now at the moment. However, when the entire economy is at risk at the macro-economic level we have the monetary and fiscal flexibility to handle it - and we should - this prevents all the non-gamblers in the economy from paying for the mistakes of the gamblers.

Such as during the 2008 GFC - are you suggesting the government and RBNZ should have let the entire country go into a deep recession to 'teach the financially irresponsible a lesson'?

by interesting1234 | 15th Jul 25, 12:09pm 1752538149

Such as during the 2008 GFC - are you suggesting the government and RBNZ should have let the entire country go into a deep recession to 'teach the financially irresponsible a lesson'?

I would argue yes. the only reason QE was used is because the USA would have lost it's global dominance if they allowed their banks and more financial institutions to fail. Then we saw large bonuses the following weeks after the bailout and risky behaviour continued with many then understanding if they became too big to fail the govt had to bail them out based on past actions. The insurance industry does the same when govt buys out land from natural disasters. Actions need consequences for behaviours to alter, and encouraging risky behaviours that have the potential to hurt many financially at the expense of the self should not occur.

by Keynes | 15th Jul 25, 12:31pm 1752539470

So the many more millions of US citizens who would have lost jobs and homes and been left destitute in a depressed economy for many years would be grateful that at least a handful of millionaires didn't get bonuses and were forced to retire early on their private islands because the banking system was allowed to collapse?

by interesting1234 | 17th Jul 25, 8:04am 1752696274

One has to hit rock bottom to know what to work up from. If a large number of Americans lost their jobs on account of corrupt practices in the real estate and banking sectors, then they would demand better oversight of said sectors and possibly we could have seen some meaningful reform to prevent future circumstances occurring of that magnitude. Instead we got bailouts and not a single thing learned nor a whiff of accountability held for those complicit in the GFC. Greed is good was the lesson, and socialise the losses they did, and they will.

by Phoenix (FKA JC) | 15th Jul 25, 1:15pm 1752542129

Just my opinion, but a substantial segment of the Anglosphere are living in depression-like socio-economic conditions. Might not exactly mirror the 30s, but it is immensely repressive. Also just my opinion, but central bank meddling plays a large part in shaping their predicament, even if the price of money is reduced to zero.

by profile | 15th Jul 25, 11:24am 1752535478

Yes, let's go back to the 1800's. No depressions, no persistent inflation, no army of public sector wastrels printing money on a whim taking up 50% of the economy and crashing the value of the working mans dollar.

$100 in 1600 adjusted for inflation.

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by Keynes | 15th Jul 25, 12:04pm 1752537884

Okay. Without 50% of the economy being directed by the government there's a good chance that there is no public health system and very little decent public infrastructure - clean water, sewerage treatment, roads, education and transport would all be limited or non-existent in many parts of the country.

But probably most disappointing of all is when you look at a more granular chart of inflation during the 1800's it had wild swings including periods of deflation and it was very difficult to sustain a business during this time because of the instability.

So that probably means being a 'working man' included extended periods of un-employment - without a welfare check from the government.

by profile | 16th Jul 25, 7:47am 1752608844

"most disappointing of all" is some periods of deflation?! More disappointing than the world wars, depression and persistent inflation that the central bankers gave us? Inflation alone has already cost the working man 30% of his real income in the past five years. Some very brief periods of deflation in the 19th century caused by rapid technological innovation was more than made up by, you know, rapid technological innovation.

Can I suggest you have a read up on history? You will find healthcare, welfare, infrastructure, clean water, sewerage treatment, roads, education and transport all existed long before central banks. I suggest having a read of the Welfare State We Are In by James Bartholomew so you can learn a little about life before massive government expansion. Life After the State is another good read if you want to broaden your knowledge.

by Keynes | 16th Jul 25, 3:55pm 1752638152

Thanks profile. I no there were pockets of what we might call the welfare state but it was not universal or consistent and it was not sufficient to act as an automatic economic stabilizer in economic down-turns - ala the Great Depression in t he 1930's.

The New Deal in the US laid the foundation for modern government economic policies - deficit spending and the universal (if you were white) welfare state that underpinned the post WW2 economic boom for ALL modern economies in the world today.

The key economic principles and forces have not changed since Keynes identified them but the economic world-view in NZ in particular ignores this completely.

by Independent_Observer | 15th Jul 25, 1:00pm 1752541202

Well risk came with consequences back then - but no longer. The mantra now is just gamble as much risk as possible and the government and central bank will nearly always come to your rescue. Ie asset prices and capital and debt markets must be protected at all costs. Risk…what risk? How then do you price debt and risk vs return when there is virtually no risk?

It’s made a new version of a completely dysfunctional economy and markets. One extreme to another.

by Phoenix (FKA JC) | 15th Jul 25, 1:51pm 1752544265

This is my thinking and you express it nicely. Eliminating risk but at what cost? Is this going to be the recurring theme until the boomers all leave their mortal coil?

Then what?

by Independent_Observer | 15th Jul 25, 1:54pm 1752544444

Reversion to the mean. And we've just been living in a period of extreme economic conditions that people have decided is a 'new normal'. (eg house prices rising significantly above the general rate of inflation for 20-30 years - this is highly unusual and highly unsustainable when wages/rents are the cash flows that determine the price of the asset/house/land and they rise at or around the general rate of inflation). I think private debt to GDP needs to come back down below 100% which is going to be painful.

I think since GFC our private debt to GDP has been sitting around 150-160% of GDP - facilitated primarliy by ever falling interest rates. If we have stable or rising interest rates I don't see how this is at all sustainable.