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Economists Warn of Potential Interest Rate Increases Amid US Tariff Changes

While US President Donald Trump‘s trade tariffs may not directly target New Zealand imports, the ripple effects could still impact Kiwis, particularly in the property market. Economists warn that these tariffs on Mexico, Canada, and China could lead to higher interest rates in New Zealand than previously anticipated.

Council of Trade Unions (NZCTU) economist and policy director Craig Renney predicts a 50 basis point cut in the next Reserve Bank monetary policy update. However, he cautions that the tariffs could have far-reaching consequences. “One of the first things that is likely to happen is that US interest rates won’t fall as fast as people are expecting because inflation is likely to rise in the US,” Renney explains.

The disparity between the US Federal Reserve rate and the New Zealand cash rate influences mortgage rates in New Zealand. This could mean increased pressure on the rates banks offer to home loan borrowers. “You might see the OCR fall in New Zealand, but it could have no impact on mortgage rates. The Reserve Bank might have its foot on the accelerator trying to reduce the cost of borrowing, but it may not make a difference for domestic residential borrowing,” Renney adds.

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Tariff Impacts on Interest Rates and Exchange Rates

Westpac chief economist Kelly Eckhold also anticipates that tariffs will affect interest rates. “There is likely to be upward pressure on long-term interest rates and US inflation. This could flow over to New Zealand interest rates, although the inflation consequences are less clear due to increased global supply of manufactured goods versus a weaker exchange rate,” Eckhold explains.

He suggests that the Reserve Bank will need to consider various factors and make assumptions about tariffs, potential impositions on New Zealand exports, and global retaliation. Eckhold highlights that a significant impact may come in the exchange rate, with the US dollar likely to rise and the New Zealand dollar weakening in comparison.

“We suspect that the exchange rate will move lower in response to further trade policy shocks, which could be better for exporters. However, it also means households face higher traded goods inflation than seen in the past year,” Eckhold notes.

Inflation and Global Demand

Infometrics chief forecaster Gareth Kiernan emphasizes that higher inflation in the US may not necessarily translate to other countries. “The outcome for other countries will depend on which effect dominates: weaker global demand leading to lower inflation, or higher input costs for businesses affected by import tariffs leading to higher inflation,” Kiernan states.

For Kiwis, products sourced from North America may become more expensive, but weaker global demand could reduce price pressure on goods from other countries. Kiernan expects that the effects on inflation may not be evident until the second half of 2025.

Potential Implications for New Zealand’s Economy

Kiernan anticipates softening expectations of international economic growth into 2026, potentially undermining New Zealand’s export performance and economic growth. “The direct effects on households in provincial regions from weaker export incomes are straightforward. For the rest of the country, it could mean a less pronounced or sustained recovery from the stagnation and recession of the last two years,” Kiernan concludes.

As the global economic landscape shifts, the New Zealand property market may face challenges and opportunities influenced by these broader trade policies and their impacts on interest rates and inflation.

SOURCE: RNZ