The latest talk on the street is the OCR (Official Cash rate) reduction that has taken place. A lot of
news articles tend to shroud their explanations in technical words, so we’ve tried to explain the
OCR cut and its consequences in simple language.
Firstly, what is the OCR?
The OCR is a figure or percentage that is used as a mechanism to set the sale price of money to banks. The Reserve Bank of NZ (RBNZ) sells money to local banks, who then on sell this to customers who take out loans (i.e house mortgages).
The purpose of this is to ensure the RBNZ has the ability to control inflation within the country, by raising or lowering the cost of borrowing money. In effect, this directly impacts interest rates as local banks will pass on the costs they incur to borrow money and sell it to consumers.
When did the OCR come into effect?
The reserve bank was tasked with managing inflation and setting the OCR in the early 90’s. This was an effort to prevent the high inflation spikes that were witnessed in the mid 80’s. The RBNZ was given a target range for inflation to be maintained at (1-3%) and then instructed to use the OCR rate to control this. In effect, raising and lowering interest rates accordingly – which in turn fuels or flattens an economy.
Why all the drama around the OCR?
During Covid, the RBNZ fuelled the economy by lowering the cost of money. This made interest rates low and money was easy to borrow. This was done in an attempt to prevent the economy being stagnated by the effects of lockdowns and reduced consumer spending.
The economy rapidly rebounded after the covid lockdowns. THE RBNZ quickly realised the efforts to stimulate the economy with cheap money had resulted in inflation getting out of hand. To
counteract this the RBNZ steadily raised the OCR in an effort to control inflation.
This made them very unpopular with the general public as interest rates on loans increased resulting in less discretionary spending. In turn, this reduced general spending and shrunk the economy. The RBNZ then steadily lifted the OCR until inflation was under control.
Why is the OCR rate cut so celebrated?
The reason the recent rate cut is celebrated is because this marks the start of interest rates beginning to reduce. In effect, the RBNZ has lowered the price it sells money to the banks. Banks have jumped on this opportunity to then lower their interest rates in an effort to attract more customers.
The good news is this fuels the economy, promotes economic activity and makes the cost to borrow money cheaper. Consumers can expect interest rates on their loans to decrease, which then gives them more discretionary funds. Business owners can expect a slight uptick in sales as consumers will now have to spend less on interest and be more likely to be able to afford to go out for dinner.
Everyone wins when interest rates drop, and the reduction in the OCR will result in just that. Unless
of course the drop in interest rates results in an overheated economy again and the cycle will start
again.
Purchasing a home is a major decision in your life. Here at Manor Build we see the big picture. We
realise interest rates, loans and finance are all things that can be confusing. For any questions or
concerns around the buying process speak to our friendly team. Manor Build has had many years of combined experience dealing with Banks, advising on loan/ finance plans and putting finance
terminology into basic terms.
