RBNZ Probes Decline in NZ’s Natural Interest Rate
Pushing in the other direction, high population growth and increasing labour force participation among older households have kept the natural interest rate higher than otherwise.
This natural rate of interest is closely related to the neutral rate of interest and is an important benchmark for monetary policymakers when considering the level of the Official Cash Rate.
The decline in the natural interest rate among advanced economies has been widely studied. Our new research explores the factors that have contributed to this decline in New Zealand over time.
To better understand the natural interest rate, the authors build a model capturing how households’ savings decisions change over their lifetimes. The model also accounts for the impact of changes in New Zealand demographics and government debt levels, as well as global trends.
A key driver of the decline in New Zealand’s natural interest rate is labour productivity growth, which fell in New Zealand after the Global Financial Crisis.
As captured in the model, people tend to save more as productivity growth falls, because they don’t expect incomes to rise as much in future. In turn, more savings in New Zealand flow through to a lower natural interest rate.
The natural interest rate across many advanced economies has fallen in recent decades, with the world natural rate falling about 1.5 percentage points in the post-GFC period. With New Zealand integrated into global financial markets, this lower world natural interest rate has flowed through into a lower natural interest rate in New Zealand.
The impact of these drivers has been partially offset by higher population growth and increasing labour force participation among older households. This is because households who expect to work for longer tend to save less for retirement. Higher population growth means more younger households in the population, who tend to save less than older households. Lower domestic savings means a higher natural rate of interest.
Understanding the drivers of changes in the natural interest rate is important for central banks and helps inform expectations on where the natural rate will move in future.
“If the natural and neutral rates of interest remain low, this would suggest an ongoing need for alternative monetary policy tools when encountering the effective lower bound (close to zero interest rates) on central bank policy rates,” the authors say.
The model developed in this research has a wide range of potential extensions which future work may explore. These extensions could include modelling different types of households in more detail or introducing a risk premium between the return to safe and risky assets.
https://www.rbnz.govt.nz/hub/news/2025/05/research-investigates-why-the-natural-interest-rate-has-fallen-in-new-zealand-over-recent-decades