US Inflation and Bond Yields Drive Up New Zealand Mortgage Rates

Higher US bond yields are pushing wholesale swap rates in New Zealand, which could lead to increased fixed mortgage rates. The American economy appears robust, with declining inflation, strong consumer spending, and a stable unemployment rate of 4.2%. This economic strength is influencing global financial markets, with traders anticipating further interest rate hikes by the Federal Reserve. As a small economy, New Zealand's wholesale funding costs are heavily impacted by international developments, particularly from the US.

Locally, the labour market is showing signs of stabilization, with job growth in September across various industries. However, regional disparities persist, with Canterbury performing well while Northland struggles. The Government's Pre-election Economic and Fiscal Update (PREFU) revised its forecasts, indicating that unemployment and inflation will remain elevated for longer than previously expected. Despite this, the Government anticipates returning to a surplus by 2029, with an improved fiscal position.

Globally, interest rates have surged, with longer-dated bond yields reaching levels not seen in years. The US rates are at their highest in 25 years, driven by investor nerves and shifts towards AI investments. This global trend is tightly linked to New Zealand's interest rates, particularly for longer-term bonds. The difference between the 2-year and 10-year bond rates in New Zealand has widened, reflecting the global upward pressure on rates.

On a positive note, the New Zealand dollar has weakened, falling below 56 cents. This currency depreciation benefits the economy by making exports more competitive and attracting foreign investment. Tourism operators in Rotorua report a rebound in visitor numbers to pre-Covid levels, although overall spending remains slightly lower.