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Even though the Federal Reserve Bank (the Fed) is based in the US, changes they make to their interest rates still affect us in New Zealand.
This is because of the amount of debt we, as a country, have. As a proportion of our Gross Domestic Product (GDP) our mortgage and consumer debt adds up to more than 90%. Not only does that put us ahead of the US and UK, but our households are more indebted than those in Spain, Greece and Italy. Australia is even worse at 121% [1].
To help fund our household debt, our banks borrow money from overseas. According to the last Reserve Bank of New Zealand's Financial Services Report, our banks currently source 22% of their funding from overseas [2]. The cost of overseas funding has remained relatively low in recent times. But if the Fed increases their interest rates, this will contribute to an increased cost for this funding. Higher funding costs are likely to be passed on to us through higher interest rates.
In December of last year the Fed projected two interest rate increases for 2019.
With this in mind:
Shop around for a higher interest rate and lower fees.
If the Fed increases their interest rates, you may see slightly more interest earned on your savings.
And here's three ways you can minimise the impact of these interest rate hikes
Consolidate your debts, negotiate a better interest rate.
Medium-term loans such as personal or car loans are affected.
While mortgage rates are relatively low, fix them.
Long-term loans such as mortgages are also affected.
Wait for the 2-for-1 deals or sales.
Demand for luxury goods and services decreases so to generate business some brands may decrease their prices.
[1] NZ Herald, The ugly truth about our household debt, 17 Sep 2018
[2] Interest.co.nz, 325 debt disposable income ratio household debt growing more sustainable rate, 29 Nov 2018
