New Zealand's low interest rates still higher than US, Europe

(iStock)
(iStock)

New Zealand's interest rates are at record lows, but nowhere near as low as the United States and Europe.

The US Federal Reserve has kept its key lending rate on hold at between 0.25 and 0.5 percent.

The decision was widely expected. But what does it mean for US borrowers?

Thirty year mortgage rates are sitting at 3.39 percent and 15 year mortgages are sitting at 2.62 percent.

Savers are looking at rates of between half a percent and just over one percent.

Rates have fallen even lower in Europe and Japan, as central banks attempt to boost their economies.

The European Central Bank's key lending rate was cut from 0.05 to zero in March.

The low rates are the reason that assets like shares and property have done so well in recent years. Investors are chasing what is known as "yield".

Yield is the income earned from an investment. This includes interest from savings accounts and bonds, the dividends paid by companies listed on the share market, or the rent from an investment property.

Companies listed on the New Zealand share market are paying dividend yields of five or six percent.

That looks very attractive to offshore investors.

But the New Zealand share market is small by global standards. So is our property market.

The big global investment funds have billions of dollars they need to move around and invest somewhere.

They not only want a good return but they want to invest in assets that are "liquid". That means assets that can be easily sold.

Many investors are also nervous that assets like shares and property are becoming overvalued.

So they are rushing to buy "safe haven" investments like ten year German government bonds.

That has driven up the price of those bonds. The bonds pay a fixed interest rate. That means that when people pay more for the bonds their yield falls.

The yield on the ten year German bond is now just below zero. That means that investors are essentially paying the German government for the privilege of having it look after their money.

The yield on ten year Japanese government bonds has dropped to negative 0.17 percent.

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