The official cash rate explained
The official cash rate (OCR) is the interest rate set by the Monetary Policy Committee (MPC). It affects the price of borrowing and saving money in New Zealand and influences the level of economic activity and inflation.
The OCR is the main monetary policy tool used by the Monetary Policy Committee. The committee reviews monetary policy settings seven times a year.
The committee sets monetary policy to contribute to public welfare by supporting maximum sustainable employment while maintaining price stability over the medium term.
How the OCR works
We are the bank for the commercial banks. Most registered banks hold settlement accounts with us, which are used for inter-bank transactions. For example, if you transfer $20 for movie tickets to your friend through online banking, the money is paid by your bank to the bank of your friend from these settlement accounts. The interest rates we apply to the settlement accounts are tied to the OCR.
Changes to the OCR flow through to the interest rates that banks use for consumers and businesses, such as mortgage or savings rates. If we raise the OCR, banks’ interest rates also tend to increase and vice versa. This is because the OCR influences the banks’ costs, so as with any business, changes in costs are passed on in their prices.
A decrease in banks’ interest rates usually results in people spending more. This is because borrowing money becomes cheaper at lower interest rates, and saving money is less attractive because of lower returns. When people spend more or save less, economic activity, employment and inflationary pressure increase. The opposite happens when the OCR increases and banks’ interest rates rise.
How OCR changes flow through the economy
This diagram shows how a cut in the OCR would flow through the economy.