27 Jul 2021

Reserve Bank study finds seniors' incomes hit hardest by low interest rates

5:01 pm on 27 July 2021

The incomes of older people without a mortgage have taken the biggest hit from low interest rates.

New Zealand banknotes, pen and calculator on background with rising trend green line

Photo: 123RF

The Reserve Bank has looked at the effect its loose policy settings from 2016 to 2020 have had on on household incomes. It is part of a wider analysis of how monetary policy settings impact the distribution of wealth.

The report centred on mortgage rates and term deposits and did not consider the impact monetary policy had on employment or asset prices. It assumed households did not change their behaviour when interest rates fell, ie they did not shift their funds out of term deposits and into shares.

It shows that on average those who benefitted the most from lower interest rates were low income mortgage holders.

Their discretionary income rose 1 percent because the lower rates reduced their debt repayments.

That coincided with average mortgage rates falling from 5.18 percent in 2016 to 3.73 percent in 2020.

Reserve Bank manager of policy and research development Gael Price said: "We find that the people most likely to spend are generally lower income households. That's true in a wide range of economic research, and especially if those low income households have a lot of debt".

But those with money in the bank, such as renters or the mortgage free elderly, had a slight income drop of 0.4 percent as deposit rates fell.

Term deposit rates had fallen from 3.24 percent in 2016 to 2.21 percent in 2020.

Price said people over the age of 65 felt the squeeze on their wallets more than others, as their incomes decreased by half a percent.

"Incomes are lower for those who are already earning the least and those bottom three income deciles are almost all in the 65-plus age group," she said.

Young people in their prime earning years, aged 24 to 54, saw their incomes rise by 0.3 percent.

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