Global Rate Hikes Lift Kiwi Mortgage Costs and Steepen Yield Curve

New Zealand's financial landscape is feeling the ripple effects of soaring US interest rates, which have reached their highest levels in 25 years. This global trend is pushing up longer-term Kiwi interest rates, particularly for fixed mortgages, as wholesale rates tend to move in sync worldwide, especially for terms beyond five years.

Kiwibank economists highlight that longer-dated US bond yields, including 10- to 30-year government debt, have surged to levels not seen in years. While economic fundamentals drive interest rates, the term premium, reflecting the risk of bond market sell-offs or government defaults, is generating significant attention. Debt-heavy nations are particularly vulnerable to these shifts.

Another factor at play is the surge in AI investment, which may be diverting funds away from government bonds. The strong correlation between global and Kiwi interest rates means that rises offshore are steepening New Zealand's yield curve. The difference between the two-year and 10-year bond rates in New Zealand has widened from 100 basis points in May to 120 basis points today.

Kiwibank anticipates aggressive rate hikes by the Reserve Bank of New Zealand (RBNZ), with markets pricing in a cash rate of 3.1% by year-end and 4.1% by December 2027. While the Kiwi currency has weakened, falling below 56 cents, a weaker dollar offers a net benefit by boosting export earnings. However, it also fuels imported inflation, complicating the RBNZ's decisions on further rate increases.