New Zealand interest rates so high because we're not good at saving, Treasury says; Improvements will help lower NZ$

New Zealand interest rates so high because we're not good at saving, Treasury says; Improvements will help lower NZ$

New Zealand's real interest rates have been higher on average than in most of the OECD due to our low levels of national savings, Treasury said today.

In a research paper entitled Why are real interest rates in New Zealand so high? Evidence and driversTreasury said low rates of national saving relative to investment (domestic imbalances) had maintained the wedge between New Zealand and international real interest rates over most of the past two decades. This was because domestic imbalances made higher real interest rates necessary to maintain inflation within the Reserve Bank's official target range, currently 1-3% over the medium-term.

An improvement in New Zealand's domestic savings would help lower the New Zealand dollar, which is boosted by capital inflows seeking higher yields than are available elsewhere, Treasury said.

The government-appointed Savings Working Group is due to report back to the government on how to increase national savings in January next year. This will come ahead of the 2011 budget in May, which was likely to be focused on savings and investment, Prime Minister John Key said yesterday.

Here is the paper.

And here is the release from Treasury:

The Treasury today released a research paper which outlines an analytical framework to answer the question as to why inflation-adjusted interest rates have on average been higher in New Zealand than in most Organisation for Economic Cooperation and Development (OECD) countries over the past couple of decades.

The working paper, entitled Why are real interest rates in New Zealand so high? Evidence and drivers, concludes that New Zealand’s relatively high real interest rates over most of the past two decades have been primarily driven by saving and investment imbalances within the local economy, rather than by an exogenously imposed country risk premia.

Key conclusions of the paper are that:

  • New Zealand real interest rates have on average declined over the past two decades. This is consistent with the downward trend in real interest rates in most OECD countries. However, the premium on New Zealand real interest rates relative to most other OECD countries has remained high. Low rates of national saving relative to investment (domestic imbalances) have maintained the wedge between New Zealand and international real interest rates over most of the past two decades because domestic imbalances make higher real interest rates necessary to maintain inflation within the official target range over the medium term;
  • Country risk premia, (in particular, default risk premia) could also potentially drive a wedge between New Zealand actual interest rates and the “world” rate. However, the evidence for New Zealand suggests that this has not been a material driver of the interest rate premium over the past two decades.
  • The overvalued New Zealand dollar is consistent with foreign inflows seeking out a higher yield currency (carry trade), rather than foreign investors reluctantly lending to a risky debtor.
  • Seeking out the higher yield, foreign capital flows into New Zealand puts upward pressure on the exchange rate. It is this relationship between the real exchange rate, exchange rate expectations and the real interest rate that has helped maintain the premium on New Zealand’s real interest rates relative to that in other OECD economies;
  • A permanent increase in national saving, all else equal, would reduce domestic imbalances and take pressure off domestic resources, which would permit the inflation target to be achieved with lower average domestic interest rates. As the premium on New Zealand interest rates relative to interest rates elsewhere would be smaller, it would be expected that the exchange rate would be lower on average too – at least for a few years.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

5 Comments

Comment Filter

Highlight new comments in the last hr(s).

New Zealand interest rates so high because we're not good at saving...

An unfortunate generalisation. Many Kiwis are great savers, and not drowning in debt.

Improvements will help lower NZ$...

Great if you're a farmer or any other exporter, but not so great if you're hoping to travel abroad, or buy something from overseas.

I don't think the question is why are NZ rates so high but why arn't everyones rates (including NZ) higher.  Why should savers be expected to put up with negative after tax real interest rates and most of the rest of the world is even worse.

And because our taxation system favours debt fueled property investment, and John Whitehead has had made a useful suggestion to help deal with that in the past = capital gains tax.

And because our monetary policy is ineffective in dealing with non-tradeables inflation (see above) because it trys to hit two targets with one stone and misses the root cause target and whacks tradeables instead. Whereas if RB used a modified CFR specifying a fixed proportion of "non-market funds" (onshore tds) said td rates would be higher helping NZ savers and tradeables, because the OCR could remain lower and take the heat out NZD.

And because no bugger wants to grasp those nasty nettles.

Dismal.

Haaahaha what a laugh....we can't save cos we have to feed the banks and the landlords who are buying up property with bank dosh and being given tax credits on the interest costs...so the price of property is pushed up by stupid govt policy to pay a landlord benefit and allow the interest deduction on the argument that landlords operate a business...haaaaaaaaahahaha....and families are being enticed into the banks to borrow a mortgage that is bloated to buggery because the property prices are insane......and now we read that the ECBB ( I added a B for bullshit ) is printing its way to inflation and higher rates......won't that be fun when they smash the families in Noddy.......

Wolly: Tell me why a person that chooses property investment as a business should not receive the same tax deductions as any other person that chooses to go into business?

I have had both and I fail to see why property investors are singled out so often. Without them all those people on this site, that love to rent, would be in really big trouble.

Nobody despises a small business, so don't despise those that chose to start out on the property ladder. Good luck to them I say, but as with any small business many will fail. That is life, we learn from our mistakes. (hopefully)

Your access to our unique content is free - always has been. But ad revenues are diving so we need your direct support.

Become a supporter

Thanks, I'm already a supporter.