Q: My mortgage has doubled and my wife has had to go back to work. I just wonder where all the extra money we give to the bank goes. I hope whoever gets it finds it useful. Maybe they could ring my wife and thank her. - Jeremy W.
A: Wow, that sounds like a painful adjustment, alright all right. Sadly, it’s one that many Kiwis are grappling with as interest rates have sky-rocketed from record lows to levels we haven’t experienced for about 15 years.
The short answer to your question is most of your extra outgoing money is going to savers in the form of the higher interest rates banks now have to offer on deposit accounts.
Like a lot of things in economics, there are two sides to the interest rate equation (that should theoretically balance out).
In other words, the banks shouldn’t be making more money off a higher Official Cash Rate. It’s easy to be a bit sceptical about that.
Reserve Bank data shows net interest margins did creep up as rates rose through 2022 until about mid-2023. They have plateaued now. Intuitively, it always feels as if the bank deposits are a bit slower to rise than mortgage rates after an OCR hike.
For the record, the RBNZ makes the point that higher interest rates slow the economy through several channels and cash flow is just one of them. Others include:
- The savings and investment channel - which slows the economy by encouraging people to delay their consumption and investment to the future;
- The wealth channel - which slows spending because people have less equity in their houses and other assets which they can draw on for consumption;
- Higher interest rates also keep the exchange rate higher than otherwise, which reduces exporter incomes and reduces import prices in NZD terms;
- Inflation expectations are influenced by central bank credibility, and elevated interest rates signal that the RBNZ is serious about targeting inflation.
End of year update: When this question first ran in March most people were dealing with rising interest rates. How hopefully after a series of Official Cash Rates mortgage holders should see their payments falling.
The same principle applies - in reverse - the money you get back from paying lower interest rates will be balanced by deposit holders getting lower returns on their savings accounts. You can also reverse-out the expected impacts outlined above as rates fall.
That means, hopefully, with lower rates in 2025 we’ll see consumers more willing to spend, house prices will start to rise (creating a wealth effect) and the Kiwi dollar his expected to fall (bad news for imports but good news for exporters).
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
