The US Federal Reserve's quarter-point rate hike this morning was neutral for New Zealand borrowers, with key two to three year swap rates - on which fixed rate mortgages are based - falling by a few basis points in response.

A more subdued than expected GDP reading, showing the New Zealand economy grew by just 0.4 per cent over the December quarter, also put downward pressure on local rates.

As expected, the Federal Reserve lifted its fed funds rate to a range of 0.75 to 1.0 per cent, and left intact its so called "dot plot" plan to institute two more hikes before the year's end.

Expectations had begun to build in the market that the central bank might take a more aggressive stance in response to the expansionist policies being put forward by US President Donald Trump.


"First, the Fed didn't move up the dot plots, so the decision was more dovish than the market had feared," Christian Hawkesby, head of fixed income portfolio management at Harbour Asset Management, said.

"Second, New Zealand gross domestic product came in lower than expected, potentially keeping the Reserve Bank on the sidelines with a record low official cash rate (1.75 per cent) for longer," he said.

Looking forward, financial markets will be closely watching the US for signs of inflation rising under the Trump administration.

"In that environment, you would see the Fed and Reserve Bank of NZ lifting interest rates faster and mortgage rates rising," Hawkesby said.

While local home mortgage borrowers had little to fear from the Fed's latest move, New Zealand home lending rates face challenges from another source; deposit growth is not keeping pace with credit growth, which is putting upward pressure on lending rates.

In this morning's announcement, Federal Reserve chair Janet Yellen sought to reassure investors that the central bank's latest interest-rate increase did not represent a shift to a more aggressive policy driven by fears of faster inflation.

Speaking to reporters, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2 per cent goal and that it intended to keep its policy accommodative for "some time".

In the US, share prices rose and bond yields fell as investors viewed the statement as a sign that the Fed was in no hurry to remove monetary stimulus as the economy continues to recover, slowly, from the Global Financial Crisis.

"Although they did hike rates as expected, they struck a very neutral tone and they did not revise up their forecasts for inflation, employment and interest rates as much as they might have done," ANZ senior economist Sharon Zollner said.

Zollner said that, if anything, rising interest rate markets had "taken a breather" from the announcement, adding most of the movement in markets took place last week in anticipation of the rate hike.