Next US hike will eclipse our OCR for first time since 2000
We’re about to see something in global interest rate markets that hasn’t happened in almost two decades.
When the Federal Reserve hikes interest rates next, widely expected to be in June, the US overnight rate will be higher than our Official Cash Rate (OCR) for the first time since late 2000, more than 17 years ago.
That’s somewhat of a milestone, given everything that’s happened over the past 10 years.
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.
We aren’t as reliant on offshore funding as we were 10 years ago, and the maturity of our bank borrowing has also lengthened. This means we are much better insulated from any funding shocks or increases in borrowing costs that emerge from overseas.
New Zealand’s net foreign liabilities, essentially what we owe to the rest of the world, fell to 55 per cent last year. That’s the lowest level since the 1980s, and a far cry from almost 85 per cent back in 2009.
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’d be foolish to think we’re completely immune.
It’s an interesting time for the US Fed, and especially new chairman Jay Powell, who took over from Janet Yellen earlier this year.
Having persisted with near-zero interest rates for eight years, the Fed has raised interest rates six times since the end of 2015, with the most recent hike coming just last month. They’re planning another two increases this year, with three more rate rises pencilled in for 2019 and two more in 2020.
If things play out that way, it will take the US cash rate to about 3.4 per cent, more than a full percentage point higher than what our own Reserve Bank is forecasting the OCR to be at the same time.
Rising interest rates aren’t all bad, even if it means rising costs for borrowers and headwinds for asset prices. The Fed is simply responding to a strengthening economy where unemployment is falling, wage rises are on the horizon and inflation might even make a long awaited reappearance.
You can’t have your cake and eat it too.
For sure, things are pretty buoyant stateside. The NFIB Index of Small Business Optimism hit the highest level since 1983 last month, with tax cuts and deregulation a notable driver of the positive mood.
With a bit of luck, this might all see the US dollar make a bit of a comeback over the next few years.
The greenback has been unloved for a while now, 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.