IDEAS home Printed from
   My bibliography  Save this paper

Why are Real Interest Rates in New Zealand so High? Evidence and Drivers




New Zealand real interest rates have on average over the past two decades been high relative to most other countries in the Organisation for Economic Co-operation and Development (OECD). This paper argues that New Zealand’s relatively high interest rates are currently the outcome of domestic saving and investment imbalances, and are less due to a risk premium being imposed by foreign investors. That is, New Zealand’s low rate of saving relative to investment make higher real interest rates necessary to maintain inflation within the target range in the face of higher domestic spending. Foreign inflows seek out the interest rate premium, rather than demand it as compensation for risk. Seeking out the higher yield, foreign capital flows into New Zealand and this 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 to cause New Zealand’s interest rate to deviate from the “world” rate for most of the past two decades.

Suggested Citation

  • Natalie Labuschagne & Polly Vowles, 2010. "Why are Real Interest Rates in New Zealand so High? Evidence and Drivers," Treasury Working Paper Series 10/09, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:10/09

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Michal Brzoza-Brzezina & Jesus Crespo Cuaresma, 2007. "Mr. Wicksell and the global economy: What drives real interest rates?," Working Papers 2007-06, Faculty of Economics and Statistics, University of Innsbruck.
    Full references (including those not matched with items on IDEAS)

    More about this item


    Real interest rates; neutral interest rate; real exchange rates; Uncovered Interest Parity; internal balance; external balance; saving;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nzt:nztwps:10/09. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web and Publishing Team, The Treasury). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.