NZ high real rates not a reflection of risk premiums
A research paper issued by the New Zealand Treasury is the latest addition to the current debate on increasing savings in the country to reduce the net foreign liabilities position and lifting productivity.The paper discusses the drivers for high real interest rates and concludes that it is due to saving and investment imbalance within the economy rather than investors demanding country risk premiums."The overvalued New Zealand dollar is consistent with foreign inflows seeking out a higher yield currency (carry trade), rather than foreign investors reluctantly lending to a risky debtor."The paper argues that even if capital markets are fully integrated and capital is highly mobile, it is still possible that the real interest rates would remain higher.A permanent increase in national saving, all else equal, would reduce domestic imbalances thus taking pressure of domestic resources, and permit inflation target to be achieved with lower average domestic interest rates, the paper says.