Connecting the dots: a yield curve perspective on New Zealand’s interest rates

This article explains the concept of the yield curve, the pattern of interest rates by their time to maturity, and how that concept helps to provide some perspective on the multitude of different interest rates that exist in modern economies. The dominance of macroeconomic influences on the government yield curve are discussed, and then the additional factors of default risk and liquidity risk are introduced in the context of the bank and mortgage yield curves. The article also indicates how careful analysis of the yield curve may be used to back out information of interest to the Reserve Bank, such as the market expectations about the path of the Official Cash Rate (OCR) and future economic growth, and how interest rate influence the exchange rate.