“Domestically, sluggish productivity growth may have reduced businesses’ incentives to invest and led households to save more than otherwise for retirement, further weighing on the New Zealand neutral rate,” he said. “Rapid population growth only partially offset these effects, with more young households [who tend to save less than older households]. This slow decline in the neutral rate has recently stalled and may have even reversed. But the jury is still out on whether this increase will continue in future.”
Conway said the RBNZ will “feel our way” as the OCR approaches its neutral estimate. “We will continually cross-check our estimate of the neutral interest rate by comparing the proximity of the OCR to neutral against what we are seeing in the real economy,” he added, noting economic activity will increase if the neutral estimate is too low.
