Monetary policy - what you need to know

Monetary policy is the name given to the management of the supply of money in an economy. The Reserve Bank does this for New Zealand by setting the Official Cash Rate (OCR) to keep prices stable and keep our cost of living from fluctuating too much.

The OCR is an interest rate (cost of borrowing money) that influences all other interest rates (such as the interest you pay on your mortgage or receive on your savings). How high interest rates are affects how much businesses and individuals spend or save – which impacts how much prices can go up (inflation) or down (deflation). Keeping prices and the flow of money around our economy stable, means our economy can grow in a healthy and sustainable way.

Monetary policy

OCR control dial

When the Reserve Bank dials up the OCR, spending and investment goes down, helping to keep a lid on inflation. When it dials down the OCR, spending and investment increases because borrowing money is cheaper, bolstering the activity going on in our economy as people bring forward future spending and investment. The Bank reviews where the OCR is set every six weeks, based on its economic forecasts. This helps to keep inflation stable and so keep New Zealand’s economic engine running smoothly.

Inflation

The Reserve Bank has an agreement with the Government to work to keep inflation between 1 and 3 percent on average, with a focus on the midpoint, 2 percent. This allows people and businesses to plan better and helps the economy to grow at a sustainable rate.