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. 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.