RBNZ : Low Rates Needed Despite Inequality, Stability Risks

By Stephen Wright

WELLINGTON, New Zealand--Low interest rates could widen income inequality by pushing up asset prices, but are needed to combat unemployment during the coronavirus pandemic, Reserve Bank of New Zealand Gov. Adrian Orr said.

Mr. Orr's comments in a speech on Wednesday highlighted the challenges facing central banks as they try to stimulate growth without exacerbating financial and social risks.

There is a perception that the central bank's actions only benefit those with assets, but it believes the biggest contribution it can currently make to "economic wellbeing" is to boost employment through lower rates, Mr. Orr said.

"We acknowledge that lower interest rates inflate asset prices, which is a transmission mechanism that monetary policy works through," he said.

"Higher house prices, for example, make people feel wealthier, more inclined to spend, which supports the economy," Mr. Orr said.

The central bank lowered its cash rate to a record low of 0.25% in March and has said it could cut it into negative territory, to keep downward pressure on retail interest rates.

Mr. Orr said there are also risks that prolonged low rates could be detrimental for financial stability by encouraging undue risk-taking.

But the current top priority, he said, is to head off the risk of deflation or unnecessarily low inflation.

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