Pressure may go on mortgage rates

UPWARD pressure on New Zealand mortgage rates has not been ruled out, with the US Federal Reserve likely to raise its interest rates further in June.

The Federal Reserve had persisted with nearzero interest rates for eight years but since the end of 2015 has raised interest rates six times, most recently in March, to 1.5%

The Federal Reserve has sig nalled a total of eight rate rises over 201820.

Craigs Investment partners head of research Mark Lister said if the Federal Reserve hiked the rate again in June, the US overnight rate would be higher than New Zealand’s interestdriving official cash rate (OCR), which is at 1.75%.

That would be the first time the US rate was higher than the OCR since late 2000, more than 17 years ago, he said.

‘‘That’s somewhat of a milestone, given everything that’s happened over the last 10 years,’’ Mr Lister said.

‘‘It could also mean we see a bit of upward pressure on mortgage rates during the next few years, regardless of what happens to the OCR,’’

However, Mr Lister said New Zealand was less reliant on offshore funding than it was a decade ago and the maturity of its bank borrowing had also length ened, meaning the country was much better insulated from any funding shocks in borrowing costs emerging from overseas.

‘‘However, we still borrow a lot of money offshore, so we can’t ignore global trends.

‘‘If the cost of money is rising everywhere else, we would be foolish to think we were completely immune,’’ Mr Lister said in a statement.

‘‘They’re planning another two increases this year, with three more rate rises pencilled in for 2019 and two more in 2020,’’ he said.

Based on those projections, Mr Lister said the US cash rate would reach about 3.4%, more than a full percentage point higher than what the Reserve Bank was forecasting the OCR to be at the same time.

Mr Lister said the US dollar had been ‘‘unloved’’ for some time, but the world’s largest economy might also be one of the higher yielding markets before too long.

‘‘Ironically, that might push New Zealand inflation up, as the cost of imports rises, which could open the door to higher interest rates of our own,’’ Mr Lister said.

Mr Lister described the US economy as ‘‘pretty buoyant’’, noting the NFIB Index of Small Business Optimism hit its highest level since 1983 last month, with tax cuts and deregulation a notable driver of the positive mood.

‘‘Rising [US] interest rates aren’t all bad, even if it does mean rising costs for borrowers and headwinds for asset prices.’’

The Federal Reserve was simply responding to a strengthening economy in which unemployment was falling, wage rises were on the horizon and inflation might even make a reappearance.