The combination of historically low policy rates and quantitative easing has lowered bond yields globally and the increased investor demand for riskier and higher yielding assets has compressed spreads. New Zealand government bonds, with their relatively high yields compared to other advanced economies, remain attractive to foreign investors who own 68 percent of government bonds on issue.
In this year’s Presidential Address to the American Economic Association, Ben Bernanke maintained that if the neutral rate is below 2% or so, the new tools will add valuable policy space but are unlikely to compensate entirely for the constraint imposed by the lower bound.3 He also added that the costs associated with a very low neutral rate, measured in terms of deeper and longer recessions and inflation staying persistently below target, underscore the importance for the central banks of keeping inflation and inflation expectations close to the target.