US Inflation Trends Drive Up New Zealand Mortgage Rates

The US economy appears robust, with inflation cooling and key sectors like manufacturing expanding. However, this strength is putting upward pressure on mortgage rates in New Zealand. The Federal Reserve's potential rate hikes and higher US bond yields are influencing wholesale funding costs globally, which in turn affects New Zealand's financial markets.

Locally, New Zealand's labour market is stabilising, with job growth across various industries. The Government's Pre-election Economic and Fiscal Update (PREFU) revealed a slightly improved fiscal position but a softer economic outlook, with unemployment and inflation expected to remain elevated for longer. The Government now projects a surplus of $4 billion by 2029, down from the earlier forecast of $2.6 billion.

Global interest rates, particularly long-term bond yields, have surged to levels not seen in decades, driven by investor nerves and shifts in investment trends like AI. This rise in offshore rates is pulling New Zealand's interest rates higher, steepening the yield curve. Despite this, the weaker Kiwi dollar is benefiting exporters, as seen in the tourism sector's recovery to pre-Covid levels.

The relationship between global and New Zealand interest rates remains strong, with offshore movements directly impacting local rates. While higher rates pose challenges, the weaker currency is providing a net benefit to the economy by making exports more competitive.