David Hargreaves examines financial statistics for the first six months of the year showing money being 'sucked out' of consumers' pockets both through higher mortgage and deposit rates

Ah, now I get it.

I admit to having been mildly perplexed when the Reserve Bank went on a kind of drive to get banks to raise their deposit rates further than they had. 

As the RBNZ embarked, in October 2021 on a momentous Official Cash Rate hiking cycle that has seen the OCR go all the way from 0.25% to 5.5%, I guess my focus had been on what would happen to mortgage rates and what the impact would be in terms of dragging money out of pockets.

Well, that has been pretty spectacular. 

Rising deposit rates, I suppose I looked on more as, well, nice if you've got some spare cash. And I interpreted the RBNZ's actions in looking for higher deposit rates as a way of our central bank trying to get the country's registered banks to 'lock in' a higher funding structure, IE that by paying more for deposit funds they would need to keep mortgage rates higher for longer. And I think that is valid and part of the plan.

But of course, when you think about it more deeply, central to the RBNZ's drive to take heat out of the economy and inflation is to reduce spending, for people to have less money in their pockets to spend and therefore fuel inflation. 

The obvious way we think of that happening is mortgage rates that we pay through the nose - removing money from us. But the more subtle way of taking money out of consumer's pockets is to get them to stick it in the bank - for a long time, where they can't get at it to 'frivolously spend'.

Well, I've been having a bit of a look at the RBNZ's own suite of month-end data releases, compiled by them from information directly supplied to them by the country's banks. We've now got six months worth of these this year, IE the first half of the year.

I was particularly taken with two data sets, the residential mortgage loan reconciliation stats and the deposits by sector stats.

These two data sets together paint a picture of how about $20 billion has been sucked out of consumers' pockets over the past 12 months. Yep, that's right. $20 billion gone from our wallets that we probably didn't know we had.

Working on the basis of a population of 5.2 million in NZ, this $20 billion accounts for around $3846 per man, woman and child.

Or to stretch this across a year, that's about $74 a week of money no longer in pockets.

Ah, the RBNZ's cunning plan. Though shalt not spend.

To look at the mortgage side of the equation, as the RBNZ stats highlighted, the quarterly interest bill topped the $4 billion mark for the first time in the June quarter 2023. 

Over the last 12 months to June 2023, the total mortgage interest bill has been $14.8 billion. In the previous 12 months to June 2022 the total interest bill was just $10 billion.

So, the increase over the last 12 months has been $4.8 billion - that's an extra $4.8 billion no longer available to spend.

Right, moving over to the deposits data and this is arguably where it gets even more interesting.

Bizarre as it is to say so, the pandemic was very 'good' for us financially. There's no doubt being locked up in your house can do wonders for the ability to save money.

Prior to the real onset of pandemic conditions here in March 2020 households were not actually saving money very well at all. 

As of February 2020 the rate of annual household deposits growth had slowed to just 4.3% - the lowest rate since 2010. 

By October 2020 the annual rate of household deposits growth had rocketed to 9.7%. What a difference a pandemic makes.

But of course, at the same time, interest rates had disappeared into the dust. The mattress on your bed was just about offering a better rate of return.

Term deposits were dying the death. Most of the money that had been accumulated during the pandemic was sitting readily available in transaction and savings accounts.

In February 2020 the amount held by households in term deposits was just over $100 billion. By the end of 2021 this had withered to just $83 billon.

But what a difference some 'real' interest rates have made.

In June 2022 there was a bit over $91 billion in TDs held by households.

As of June 2023 the figure was rapidly approaching $117 billion - an all time high.

This rapid ascent of TD balances has had an offset effect on household transaction and savings balances.

As of June 2022 household transaction account balances were $51.564 billion. By June 2023 they had dropped to $41.326 billion.

As of June 2022 household savings balances were $79.69 billion. By June 2023 they had fallen to $74.703 billion.

The significant part of all that of course is that it means households that were awash with extra cash available to spend post-pandemic, now have less money in the pockets. Less spending.

Here's a summary of what's happened in the past 12 months:

So, the upshot of all that is even though total household deposits have increased by over $10 billion in the past 12 months, more than $25 billion has been sucked away into term deposits, which is a lot of money. 

And it means that $15 billion that was previously swimming around and available for spending in savings and transaction accounts has now been vacuumed up (into TDs) and is not burning a hole in pockets.

Of course that extra $25-plus billion that's gone into term deposits is not 'gone' as such, it's sitting there attracting interest and waiting to be grabbed later. But it's not being spent now and it's not fuelling inflation.

So, between the somewhat more than $15 billion 'taken out' through re-direction into TDs and the approaching $5 billion extra for mortgage interest costs, there's $20 billion less hanging around looking for things to buy. Fascinating.

I would think that given the fact that both mortgage rates and term deposit rates have edged up again recently would be giving the RBNZ some comfort at the moment. The plan IS working. Money IS being sucked out of circulation. Now all we need is for inflation to play ball.

In the meantime it looks increasingly as though interest rates - both for deposits and for loans may well be 'higher for longer'.