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Why rising interest rates aren't crashing the New Zealand economy
Despite the aggressive interest rate hikes by the Reserve Bank, the New Zealand economy isn't showing signs of buckling under the pressure of higher debt repayments. According to Mike Taylor, chief investment officer at Pie Funds, key demographic trends are preventing the economy from crashing despite the fastest rise in interest rates in years.
Official data from credit agency Centrix confirms that consumer debt distress remains subdued. In June 2023, the number of homeowners and consumers behind on debt payments actually declined slightly. Mortgage arrears fell to 1.29% from 1.32% in May, well below the pre-pandemic peak of 1.55%.
Consumer arrears also dipped to 11.4% from 11.7% in May. While arrears have risen 5% year-on-year, the overall level remains historically low.
Taylor notes that the interest rate hikes are more muted because a large portion of household wealth sits with older baby boomers and the silent generation over age 60. Since most people in this age group have paid off their mortgages, they are less directly impacted by rate rises.
Younger people with newer mortgages are feeling more of the pinch, but default rates stay very low even for them.
Another buffer is the significant household savings accumulated during lockdowns from 2020-2021 when interest rates were low, and there was less to spend on. The monetary and fiscal stimulus programs during this period also boosted savings balances.
This pent-up wealth is helping families absorb higher debt servicing costs.
While Kiwis are coping well for now, Taylor warns inflation may prove persistent until unemployment rises enough to reduce demand pressures. The Reserve Bank will face a difficult balancing act between hiking rates to lower inflation versus avoiding excessive job losses.
Only time will tell if higher rates can tame prices without crashing the economy.
For now, New Zealand's demographic profile provides stability as interest rates climb to levels not seen since 2007.