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Low interest rates - who are the winners and losers?
“Lower interest rates can increase or decrease the wealth and income gap between the richest and poorest, but the overall effect depends on how much different groups in society gain in some ways, but lose in other ways,” Analytical Note author Jinny Leong says in this video:
There are winners and losers when interest rates are cut, but the international evidence is not clear that this always means the rich get richer and the poor are worse off.
Official interest rates around the world and in New Zealand were cut early last year to help counter the economic shock of the COVID-19 pandemic lockdowns.
Internationally, central banks aimed to encourage businesses and consumers to invest and spend more by keeping interest rates lower by other means such as buying government bonds or “quantitative easing”.
In the past year, historically low official interest rates have seen returns on households’ bank deposits halve in New Zealand to about 0.7 percent, at the same time as house prices and shares have risen more than 20 percent.
Lower interest rates can increase or decrease the wealth and income gap between the richest and poorest, but the overall effect depends on how much different groups in society gain in some ways, but lose in other ways.
International studies show it is not clear that lower interest rates always make wealth or income inequality worse, this Reserve Bank Analytical Note shows.
There has not yet been a direct study of how lower interest rates affect different groups in New Zealand, but this remains an avenue for future research. However, the share and spread of this country’s wealth and income are similar to other advanced countries, so some lessons can be learnt from overseas studies.
With lower interest rates, borrowers are generally better off and savers are worse off, but this may be a matter of gains and losses for the same groups of people.
For example, a family with their own home could earn less income from money in the bank, but the family’s wealth may have also increased because of rising house and share prices.
A first-home-buyer may need a higher deposit to get into a property because of rising house prices. That may be offset to some degree by lower interest rates on a mortgage paid over many years.
Lower interest rates also encourage greater business investment and more jobs, and typically result in a lower unemployment rate.
For example, lower income households tend to be more affected by the unemployment rate than changes in hourly wages. With lower interest rates, a lower income household faces a lower risk of becoming unemployed.
A mixed picture on wealth and income inequality
A review of international studies shows a mixed picture of how lower interest rates affect how the economic pie is shared. For example, some studies showed both wealth and income inequality became worse in the United States, the United Kingdom, France and Germany.
However, other studies in both the US and euro area showed lower interest rates actually made the distribution of wealth and income more equal, not less.
Differences in results may be due to differences in methodology, period studied, financial system and structures considered, existing distributions of wealth and income, or other public policies in place in the countries examined.
Table 1: Summary of international evidence on the distributional effects of monetary policy on wealth and income
|Effect on inequality||Wealth inequality||Income inequality|
|Increase (less equal)||France, Germany, Italy, Spain, United States, United Kingdom; United States||Japan; Japan; Belgium, France, Germany, United Kingdom; United Kingdom; United States;76 countries|
|Negligible||Japan; 8 OECD countries; Germany, France, Italy, Spain; United States; Euro area; United Kingdom; Italy||Italy; Japan; United Kingdom; Euro area; study of 32 advanced and emerging market countries|
|Decrease (more equal)||Euro area; Canada; United States||Euro area; United States; Canada, Netherlands, United States; Germany, France, Italy, Spain; Italy|
This Analytical Note is the first in a series the Reserve Bank will publish on this topic.
Scammers pretending to be from bank target grieving Auckland woman
Scammers pretending to be bank employees have attempted to target a grieving woman, insisting her bank details be changed on the same day her late husband's death notice was published in a newspaper.
The daughter of the woman posted in a local Auckland Facebook group to warn others of the scammers, who she described as "low life scum".
"My lovely dad passed away, first thing in the morning of the notice in the paper mum had a call from her bank. They wanted mum to change her bank accounts from their joint names to her own accounts in her name only," the woman wrote.
Luckily, she and her sister were present at the time of the call. The woman said she knew something didn't seem right.
"Then she hung up pretty quickly when she heard my sister and I were onto her," she said of the alleged scammer.
"I have no doubt they would have been after details to transfer money into another account for mum and we would have found it would not have got there."
The woman told Newshub her mum is an ANZ customer. The bank has confirmed they don't contact customers about deceased family members.
Newshub asked police if they were aware of similar scams circulating, but said the nature of scams changes constantly.
A spokesperson said people should hang up immediately if they believe a call to be suspicious.
Newshub has also asked the Ministry of Business, Innovation and Employment's Consumer Protection service if it's aware of such a scam or similar scams circulating but has yet to respond.
Meanwhile, police had some reminders for New Zealanders
"If you are receiving a call from someone purporting to be from a business, ask them for credentials and never hand over personal details such as computer passwords or bank account details," the spokesperson said. "If the caller is legitimate they won't mind verifying their identity.
"Anyone who believes they are a victim of a scam is advised to contact police."
Gold Band is proud to sponsor the Fallen Heroes Trust
For several years, Gold Band Finance has been a principal sponsor of the New Zealand Fallen Heroes Trust.
The Trust aims to fund projects that make a real difference in the lives of our Fallen Heroes and their families. If a member of our armed services is wounded or injured while on military service the impact on their future and that of their immediate family can be significant. While service personnel can access the health and social services available to all New Zealanders, the Trust believes their sacrifice on behalf of all New Zealand deserves to be recognised with the additional support they can provide.
The Trust also aims to make a difference for the family left behind if their loved one is tragically killed while on active duty, by helping them lead full lives and achieve their aspirations, despite their loss. The Trust’s contribution is tailored to meet the unique needs of the individuals and their families.
Although we acknowledge the sacrifice of New Zealand’s service men and women year-round, each year in association with ANZAC Day, we promote the work of Fallen Heroes and join with them in remembrance of the courage, commitment and sacrifice of those who have served, and those who serve today.
The untold interest rate story: Term deposit rates 'incredibly low' and falling
People with money in the bank are getting the lowest rates of interest since the 1960s and those rates could still fall further, it is warned.
ASB economist Chris Tennent-Brown said term deposit interest rates were “incredibly low” and there was no sign of that changing soon.
He said term deposit rates in New Zealand at present were primarily offering between 0.4 per cent and 1.25 per cent per annum for terms between 90 days and five years if a saver had more than $5000 to invest.
Reserve Bank data shows the weighted average six-month term deposit rate is 1.3 per cent, compared to 6.55 per cent in September 2000 and 4.77 per cent in September 2010. Even five years ago, rates were over 4 per cent.
But Tennent-Brown said there could be worse to come for savers.
The official cash rate is expected to drop from 0.25 per cent to below zero next April.
Tennent-Brown said the bank had received many inquiries from term deposit-holders who were worried that would mean the rates they received would turn negative, too.
“Term deposit rates are expected to dip even lower than today’s levels, as we see in other countries with similar banking systems and similarly low central bank interest rate settings.”
Retail rates are unlikely to slip below zero but inflation can quickly erode any return that is received.
It is running at an annual rate of 1.5 per cent.
“Many investors are rightly concerned about the significant income drop caused by the lower interest rates available today compared to earlier years,” Tennent-Brown said.
“Inflation is low, but it’s still there, eroding some of the real value of investment returns, including term deposit interest. In fact, the current [ASB] five-year term deposit rate of 1.25 per cent per annum is lower than what we expect CPI inflation to average over the next five years.
“Returns on the longer-term investments are typically higher than for shorter terms, but that is not the case at present, which adds to the current challenge of generating income from term deposits.”
Some people who had previously used term deposits to create a return and protect their money had opted instead to invest in income-producing equities, he said, or had shifted their money into KiwiSaver.
Some had set up income-producing investment portfolios. But the problem was worst for those who were very conservative investors and could not afford the risks that came with moving into other asset classes.
Tennent-Brown said anyone who was worried should seek advice on their plans and work out what they could achieve with the money they had.
People could maximise term deposit returns by making sure they were paying the right rate of tax, and investing in longer terms.
Update for Investors
Dear Valued Investor
I want to update you on Gold Band Finance’s position during this unique period in our shared history.
I would like to emphasise that our first focus is ensuring we are ready to meet any needs you may have. We are well placed to handle any requirements to “work from home.” Staff have the capacity to do this, with systems in place to maintain any critical services from the office to support staff working from home. My clear message is that Gold Band Finance remains open for business.
You may have noticed the Reserve Bank of New Zealand’s announcement on interest rates with a reduction in the Official Cash Rate (OCR) by 0.75%. It is almost inevitable that deposit rates will drop, including those we offer.
We are mindful that our investors rely on these interest payments and we will seek to hold our current rates for now but you should anticipate reductions in investment rates. We will remain in touch about potential changes, so you can prepare should we need to make any updates. Rates for existing investments will of course remain unchanged for the remainder of their term.
In terms of our loan exposure in a period of economic uncertainty, I thought it would be of value to outline the strength of our current position.
- The vast majority of our loans are secured by residential properties.
- We have no direct exposure to industries already affected such as tourism and forestry.
- Gold Band Finance, as has been our policy for some time, carries levels of equity in excess of that required by our Trust Deed and the Non Bank Deposit Takers Act.
- We currently hold, relative to our size, excess levels of cash on hand.
The board and I have reviewed our position and believe we are well placed to meet any challenges ahead.
I appreciate that times like this can be disconcerting and you may have questions. I have increased the level of my outreach calls to investors and if you have not heard from me yet, you will.
I welcome calls from our investors and if you do have any questions or concerns please do not hesitate to contact me at my direct number (03) 963 0722 anytime or email me at firstname.lastname@example.org.
We appreciate your ongoing support and look forward to assisting you with your investment needs in the future.
OFFICIAL CASH RATE CUT TO RECORD LOW
In today’s monetary policy statement, The Reserve Bank announced it is making a half point cut to the official cash rate (OCR).
The OCR now stands at one per cent – a record low. The cut is more significant than economists expectations, who had predicted the Reserve Bank would reduce the OCR to 1.25 per cent.
In the June quarter, annual inflation came in at 1.7per cent – below the mid-point of the Bank’s 1 – 3 per cent target range. Inflation is expected to trend lower as a raft of data and confidence surveys point to a slowing of the economy.
Read the Reserve Bank’s monetary policy statement here
As a result of the record low reached by the OCR, Gold Band Finance has announced it will adjust rates on longer term investment products from today. Details of the new rates are available at: https://goldbandfinance.nz/assets/files/gbf-rate-card.pdf
Man who scammed $3 million 'destroyed lives': Victim
The Financial Markets Authority is warning Kiwis to look for regulated investments, after a Waikato man scammed victims out of $3 million, which he promised to invest but instead gambled away.
FMA spokesman Andrew Park told the NZ Herald the "key thing" for people to remember when someone was asking them to invest money into their business was "know what you're investing in".
"You've got to take extra caution if someone is asking you to invest in a private company," he said.
"If people are thinking of investing, look at the list of products that are regulated by the FMA.
"Press pause when someone's asking you to give them your money, and check that it's all legitimate or licenced by the FMA."