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Client Question: What is the OCR?
Part of the Reserve Bank’s job is to keep inflation at between 1 and 3 percent per annum. It does this by reviewing the OCR – Official Cash Rate - eight times a year (every sixth Thursday) and, if required, adjusts it either up or down.
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Adjusting the OCR affects the price at which New Zealanders can borrow money and so influences the level of economic activity and inflation within the country. |
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► Here’s how it works.
Most registered banks hold settlement accounts at the Reserve Bank. These are used to settle obligations with each other at the end of each day. e.g. if you write out a cheque or make an EFT-POS payment, the money is taken from your bank and put into the bank of the recipient. This means the money within your bank and every other bank ebbs and flows according to demand. The Reserve Bank covers that ebbing and flowing and either pays or charges interest to your bank depending on whether they are in credit or debit. This interest is calculated daily and is related to the OCR.
Because the Reserve Bank sets no limit on the amount of cash it will borrow or lend to banks, the interest rates your bank offers you are generally held around the Reserve Bank’s OCR level.
The practical result, over time, is that when market interest rates increase, people are inclined to spend less on goods and services. This is because their savings get a higher rate of interest and there is an incentive to save; and because people with mortgages and other loans usually experience higher interest payments and have less free money to spend. When people save more or spend less, there is less pressure on prices to rise, and therefore inflation pressures tend to reduce.
► So, what does it mean for you?
In practical term it is very simple. Generally, the lower the OCR, the lower the interest rates on mortgages and personal loans etc. This means, for home owners, the lower the OCR, the better. This doesn't always follow, however, and there has been some controversy surrounding the interest rates in New Zealand increasing despite the OCR remaining low. The thing to remember in this regard that banks rates are not tied solely to the OCR. They source money from all over the world and so rates are set according to a number of criteria not just the New Zealand OCR.
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