As the money supply tightens in the US, retail banks in New Zealand will have to pay more for their money to lend to borrowers.
With fixed mortgages continuing to roll off in New Zealand, homeowners will find it much more expensive to refinance as the banks pass on their costs.
Yesterday, floating rates were around 10.7% and the key two year fixed rate was 9.7%. The three-year rate was 9.55%.
On Saturday (NZ time), the Federal Reserve announced emergency measures to add $US200 billion ($NZ250 billion) into the banking system in a bid to ease persistent liquidity strains that are leading to a global credit squeeze.
The Fed said on its website it would increase the size of its two-term auctions of short-term funding to banks this month to $US100 billion from the $US60 billion previously announced.
Analysts said the Fed's expansion of its term auctions and repurchase plan make it less likely the central bank will cut benchmark rates before its scheduled meeting on March 18.
Markets now widely expect the Fed to slash rates by at least 0.5% to 2.5% at that meeting.
The Fed has slashed benchmark rates by 2.25% since September saying its main concern is that sluggish growth could slow more than expected.
However, those cuts had not been enough to restore confidence in the credit markets, ABN Amro Craigs broker Peter McIntyre said yesterday.
‘‘This is a crisis in confidence. It is not about the equity markets. I have no problem with equities. It is a debt problem, a credit crisis. There needs to be more money running through the system.''
The lack of money had seen yields on top-rated New Zealand bonds rise to between 13% and 16% as worried sellers took any price they could find, he said.
The bleak news and worries about the credit crises caused Wall Street investors to scurry for cover at the weekend.
The main US indices hit their lowest levels in 18 months as fears about a recession rose and consumers and businesses started to take measures to ride out an expected economic storm.
The Dow Jones Industrial Average tumbled more than 3% for the week to close at 11,893, its worst level since October 2006.
The technology-rich Nasdaq composite slid 2.6%, while the broad-market Standard and Poor's 500 index retreated 2.8%.
A report showing a loss of 63,000 jobs in February, signalling a sharp deceleration in economic momentum, was the key for the fall in share prices.
President George W. Bush's top economic adviser, Ed Lazear, did not rule out shrinking economic activity for the current quarter.
‘‘This quarter will probably be our weakest quarter. Whether you call that a ‘recession' or not is something that we won't know for many months,'' he said.
Mr McIntyre said the NZX-50 was likely to follow Wall Street down this morning but not to the extent of the falls seen in the US at the weekend.
‘‘Our market lacks the sophistication and short selling seen in the US so we might be spared.''
Irrespective of whether the US was in a recession, New Zealand was facing an environment of high interest rates, a high dollar and soaring energy costs.
If the US dropped its cash rate again, trading in the New Zealand dollar would increase because of the good yield. That would keep interest rates high, he said.
In the coming week, the US market will get fresh data on the US trade balance - a report that has often hurt the US dollar and had the potential to further hurt share prices.
Also expected is a report on consumer inflation, another sore point for investors since rising prices could complicate the Fed's effort to stimulate growth through interest-rate cuts.
Markets are also bracing for a monthly snapshot on retail sales, which will show how American consumers are coping with the economic turmoil.
BMO Capital Markets economist Sal Cuatieri said the retail sales ‘‘will reflect the perfect storm now lashing American consumers''.
