Mortgage rates, KiwiSaver and travel — business editor at large Liam Dann investigates what the ailing international economy means for you.

While New Zealanders were relaxing on ­Waitangi Day the world was in a panic.

Markets were ­crashing. Well, almost. There was some chaos, some large falls — and then a bounce back that enabled New Zealand markets to skip the worst of it.

The only thing anyone seems sure about is that investors are on edge and more ­volatility is expected

So what happened on Wall Street last week? And what does it mean for us here in New Zealand — where we keep getting told the economy is in good shape.

To understand why stock markets are nervous you need to go back to the global financial crisis of 2008.

To paraphrase Mick Crocodile Dundee: This isn't a crash. That was a crash.

When global investment bank Lehman brothers collapsed in September 2008 the entire financial system froze.

Banks were literally too scared to lend money so short term interest rates spiked.

Central banks like the US Federal ­Reserve and the Bank of England had to step in to save the day.

They did that by slashing official ­interest rates to zero and effectively printing ­trillions of dollars of new money just to get commerce moving again.

Disaster was averted but the financial system was on life support. And it has been on it ever since.

Attempts to unwind these measures and lift rates have been regularly thwarted by things like the oil price slump of 2014 and a persistent lack of any inflation in the global economy.

Meanwhile, all this extra cash has been looking for a home.

With low interest rates making bank ­deposit returns so meagre, the money has flowed into stock markets and ­property markets — inflating both to levels that economists find worrying.

The past nine years have been tough for many — with wages stuck in the low ­inflation doldrums. But if you had money to invest in stocks or property, you have made a killing.

Auckland's housing boom is well ­documented but believe it or not our stock exchange has outperformed it.

At its peak last month the local NZX-50 gross index had risen more than 240 per cent from a low in February 2009.

That kind of puts last week's falls into context. However, we're not out of the woods yet.

Despite the US Federal Reserve repeatedly signalling and warning that rates will eventually go back to normal — no one has much faith markets can cope with the move when it happens.

And the signs are it will finally happen this year. The US Federal Reserve indicated it is likely to hike rates three times this year, ­taking the ­official cash rate to two per cent.

That's still low by ­historic standards but stock market ­investors don't like it. Some even ­predict four hikes. Basically, the stronger the US economy gets the more ­likely they are to lift rates.

Last week's mini-crash was sparked by unexpectedly strong employment data. 
So if you're worried about ­markets watch out for good news.

In New Zealand the economy has been stable for longer. We came out of the global financial crisis faster than the US thanks to China and a boom in dairy prices.

So our official interest rates are already at 1.75 per cent and not expected to rise again for about 12 months.

But that has very little bearing on the fortunes of the local stock ­market. We're tiny and a big chunk of the money invested in ­local stocks is from offshore. So we ­remain very much at the mercy of Wall Street.

There are some pluses to the New Zealand's equity markets, though.

Although we inevitably follow Wall Street up and down, the ­l­ocal market is dominated by large ­utility and infrastructure stocks, such as power companies, that have ­stable businesses, steady profits and ­offer investors attractive ­dividend ­returns.

That has tended to make New Zealand's market a bit more of a safe haven than many, at least in the past 20 years. And unlike in the US (and this ­country in 1987) not many New ­Zealanders invest ­directly in stocks.

That means the fall in market value doesn't have such a ­dramatic impact on consumer confidence and the wider economy.

In New Zealand it's a house price crash that economist really fear. Most of us are exposed to stocks through KiwiSaver and other ­retirement funds.

These can still go backwards, which isn't pleasant, but they are structured to focus on long term returns and — by pooling money with fund managers — investments are diversified across a range of ­different markets, industries and assets classes. This includes quite a large proportion of cash deposits.

The next few months are ­expected to be a bit of a roller ­coaster for equity markets as ­investors adjust to the changing economic cycle. We are likely to see a few more days with scary graphs and gloomy brokers staring at us from the front page. It is dramatic stuff and fascinating to read about.

Some argue that like bush fires, market meltdowns are part of a natural cycle. Serious investors see them as creating opportunity. They bring values back into line with the real-world profits of companies. They clear out the dead wood.

But like bushfires they sometimes rage out of control.

Mortgage rates

The sharemarket ructions of the past week were stoked by the belief the US's central bank — the Federal Reserve — will lift interest rates.

Although there are always dissenters, many market watchers anticipate the Fed will lift its rates three times this year.

Data released this month showing that wages in the US rose by more than people were expecting made those rates rises a surer bet.

A rise also puts upward pressure on mortgage rates in New Zealand, given a large component of the interest banks charge is due to overseas borrowing costs.

Another factor that influences what you pay for mortgage rates is the Official Cash Rate, set by the Reserve Bank here in New Zealand.

The OCR is at a record-low rate of 1.75 per cent and the Reserve Bank doesn't think it will lift it until the middle of next year.

Local economists disagree on when the Reserve Bank will move. Some predict a hike at the end of this year but others think it won't come until 2020.

David Tripe, Massey University's banking expert, said last month that interest rates would be higher by the end of 2018.

"If we start to see bubbles of inflation from the new Government that might encourage a rate rise."

Increasing the minimum wage to $20 an hour by 2020 would push up wages at the lower end, which was likely to increase inflation, he said.

That could mean short term rates start to rise as banks price in an increase in the Official Cash Rate, which affects floating and short term rates more than longer term fixed rates. "It is much more likely rates are going to rise over the next two years than fall," Tripe says.

But he doesn't think they will rise by much because household debt is so high. 
That means any increases to rates will bite into people's spending capacity.

— Hamish Fletcher