Fed move will boost NZ rates

As was widely expected, the Fed increased its benchmark interest rate by 25 basis points from 0.5% to 0.75% this morning.

The Fed also signalled that it plans to rise rates three times in 2017 and that, following that, three further rate rises in both 2018 and 2019, are planned to take the benchmark rate to 3%.

In a statement, the Fed’s policy-setting committee said the decision came in response to reports of generally strong labour market conditions and inflation.

ANZ chief economist Cameron Bagrie said the move was no surprise but, on the margins, the Fed was more upbeat and this meant interest rates here will gravitate a bit higher.

“Long term interest rates are going to be biased up over time.

“And you do start to wonder if, given the amount of leverage we have around the globe, when we will see some negative effects from the higher interest rates.”

New Zealand interest rates are set to head higher, Westpac acting chief economist Michael Gordon agreed.

He said the surprise element of the Fed’s announcement came around the guidance for future interest rate increases.

“The Fed is indicating three rate hikes next year rather than two as was previously planned. This is to accelerate the pace of normalising interest rates.”

This meant there are now a number of forces pulling in the direction of higher interest rates, he said.

“It’s not just the Fed’s decision. There was a turn in the trend a couple of months ago when it became clear that inflation globally has probably bottomed out.

“Donald Trump’s election has also led to market expectations of a big spend on infrastructure, although that element is questionable.”

Overall, interest rates globally have started to rise and this trend will continue – although rates are not likely to reach the point they have in the past, Gordon added.

The Fed’s move this morning also takes some of the pressure off the Reserve Bank.

NZIER senior economist Christina Leung said the Reserve Bank has previously indicated that it doesn’t want to take the OCR below its current record low of 1.75%.

“The Fed’s rate rise means the US dollar is likely to rise and lead to an easing in the NZD and that will make it easier for the Reserve Bank.

“Essentially, it increases the likelihood that the OCR has reached its trough in this cycle.”

In turn, this makes it more certain that the next moves in interest rates will be up, she said.