While the Reserve Bank of New Zealand last year cut its Official Cash Rate (OCR) to 2.25%, the market has priced in two rate hikes of 25 basis points each before the end of the 2026 year, based on concerns about inflation, which hit an annual rate of 3.1% last year.
Kiwibank expects annual inflation to fall back within the Reserve Bank’s 1% to 3% band this year.
“But amongst traders and the like, the discussion is shifting from rate cuts to rate hikes – and soon,“ the bank said in a commentary.
Fisher Funds’ Logan said developments in the interest rate markets were running counter to what most people would expect.
“Everyone looks at their mortgage rate as probably the main kind of interest rate that matters to them.
“With the OCR coming down, it was fair to say most people expected mortgage rates to come down as well, but since the last OCR cut we haven’t seen that, and longer rates have gone up,” he said.
It’s been a similar story in the international markets – a steepening of the yield curve with longer rates going up faster than shorter rates.
Logan said corporate borrowers are facing higher funding costs – typically 1% to 2% higher than the New Zealand 10-year Government bond yield.
“That’s going to hurt their balance sheets at a time when the New Zealand economy is yet to really feel the effects of a recovery,” Logan said.
America’s claims over Greenland, a Danish territory, have added more uncertainty to world markets.
Danish pension fund AkademikerPension last week said it would sell off its holding of US Treasuries, worth US$100 million ($167m), blaming ‌weak US Government finances.
The Bank of Japan (BoJ) has had a near-zero policy rate since 1999.
Last week, the bank left its official rate unchanged at 0.75% in a move seen by the market as a “hawkish hold”.
In the currency market, the speculation was that the BoJ and the US Federal Reserve could soon intervene to support the yen before Japan’s February 12 snap election.
There are concerns about the so-called Japan “carry trade” where investors have over the years borrowed at Japan’s historically low interest rates to invest elsewhere.
Estimates put the total carry trade as low as US$250 billion, while others put it at more than US$10 trillion.
With Japanese interest rates now on the move, the concern is that those trades may have to be unwound.
“There are always at least 10 or 20 kind of potential black swan events that we think about that could potentially blow up markets one day,” Logan said.
“In any given year, it’s extremely unlikely that any of them will happen, but that is one of them that people talk about.”
Jamie Gray is an Auckland-based journalist, covering the financial markets, the primary sector and energy. He joined the Herald in 2011.