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What is the OCR and how does it affect us?

It is looking more and more likely that New Zealand will experience yet another cut to the OCR rate with the next drop coming in August and another one predicted again in November. But what does this mean For New Zealanders? How would the OCR cut affect you?

In this month’s blogs we weight it up and go through a few OCR FAQs.

What is the OCR?

OCR stands for Official Cash Rate and it’s essentially the price we pay to borrow money. The rate is set by the Reserve Bank of New Zealand and determines the rates that commercial banks will pay on savings accounts and the rates they will charge on interest for mortgages, loans and credit cards.

Why does the OCR fluctuate?

Th Reserve Bank adjusts the OCR in order to keep inflation between 1 and 3%. Inflation is the rise of average prices across the economy. In order to curb inflation and keep the economy on an even keel, the OCR rate is a crucial factor.

By increasing the OCR, people are encouraged to save rather than spend as they can expect good returns on the money they invest. With spending reduced, the economy slows and so too does inflation.

Lowering the OCR has the opposite effect. Interest rates on savings are poor so people are less likely to spend. But with credit and loans cheaper, spending is higher, and the economy receives a boost.

Why is the OCR currently dropping?

The Reserve Bank is looking to give the economy a boost by encouraging people to spend and this is easier for people to do with lower interest rates.

How is the average New Zealander affected by OCR changes?

For New Zealanders with a mortgage, OCR drops are usually good news. Lower interest rates on mortgages means less being paid to the bank every month and more disposable income. Or, for the financially astute, an opportunity to keep mortgage payments the same but pay off more of the loan’s principal.

If you’re locked into a fixed mortgage and don’t want to pay break fees, then you’ll need to wait until your mortgage comes up for renewal to lock in a new rate.

It’s often a good idea to fix for shorter periods of time (1-2 years) when the OCR is in a state of flux so that you can take advantage of reduced rates. Of course, there is an element of risk in this strategy as rates may also rise.

It’s a good idea to speak to our home loan expert so we can help with your decision-making process.

For investors and savers, an OCR cut is not so good. The interest that banks pay out for their savings accounts and investments will drop.

This can particularly affect people nearing retirement or people who are already retired and live off the income from their investments.

Again, if you’re in this situation, please have a chat to our financial advice team so we can ensure your investment and savings are working for you as well as they possibly can.

Is it only the OCR that affects interest rates?

While the OCR plays a crucial role, it is not the only factor. Interest rates at home are also affected by the rates our banks have to pay to borrow money in offshore markets. This borrowing allows them to fund the loans of their customers back here in New Zealand and so plays a part in the interest rates they offer their customers.

Speculation around inflation, growth and the economy in general also affects interest rates as banks and investors try to predict what will happen in the future. Therefore, longer-term loans generally have higher interest rates than shorter term loans.

Concerned about how potential OCR changes might affect you? Just reply to this email and let us know if you need some advice, we’re here to help!