Households struggling to keep on top of their mortgages would
be the winners under Labour's proposed interest rate
shake-up, but at the expense of those who can't afford to get
a foot on the property ladder, a budgeting service warns.
Labour deputy leader David Parker yesterday unveiled his
party's "upgrade" of monetary policy, proposing that New
Zealanders be forced to save more through higher KiwiSaver
contributions to control inflation rather than the Reserve
Bank lifting interest rates.
At present when the economy is at risk of overheating and
prices are rising too quickly, the Reserve Bank increases
interest rates which cools activity by diverting more of
households' cash from spending on goods and services and into
However, those higher interest rates are attractive to
foreign investors who drive the kiwi higher, which in turn
reduces returns to exporters and hurts economic activity and
Labour's "variable savings rate" would be a potential circuit
breaker that would work with its previously announced policy
to make KiwiSaver compulsory and lift combined employee and
employer contributions from 6 per cent to 9 per cent. It has
not been decided what proportion will be paid by the
The new policy could mean workers have to save more than that
if the Reserve Bank recommended increased savings.
Mr Parker told the Herald reaction to the policy had been
positive, as "people prefer to save more rather than pay more
interest to banks, much of which goes overseas and it's all
lost to the person who's paying it forever".
But New Zealand Federation of Family Budgeting Services chief
executive Raewyn Fox said the policy to keep interest rates
low while forcing everyone to save more raised issues of
"The people who don't have mortgages will be in effect
subsidising the economy for the people who are obtaining an
asset by buying a house."
She said Labour's plan to make KiwiSaver compulsory would be
even tougher on those already struggling. "We see a lot of
people now who just can't make ends meet." Many of them were
not in KiwiSaver.
"Take another 9 or even 5 per cent away from them, they'll go
Mr Parker said Labour would allow those on low incomes who
entered the scheme to gradually increase their contributions
so they were not forced to contribute 6 per cent immediately.
Labour's background information says "distributional and
hardship effects for the lower paid" stemming from the
variable savings rate could be addressed by excluding lower
Prime Minister John Key said the policy was muddled.
"The reality is what Labour would be doing is putting every
New Zealander into KiwiSaver whether they wanted it or not,
then they would be forcing them to save even more than they
might otherwise want to save.
"These could be the very people who don't even own a house so
wouldn't be affected when interest rates go up, and on top of
all that the Labour Party's somehow claiming the only thing
that drives inflation is domestic consumer spending.
"In fact, inflation's quite often caused by rising
international commodity prices for things like oil, by
business spending and by Government spending."
Chris Douglas, of investment research firm Morningstar, said
Labour's policy would help people who wanted to borrow a lot
to buy a house.
"But what happens when they reach 65? Will they just have a
huge mortgage which they will have to pay off using their
- Adam Bennett of the New Zealand Herald/additional
reporting: Tamsyn Parker