What’s the Official Cash Rate?
The Official Cash Rate (OCR) is set by the RBNZ and is one of the ways they manage economic stability.
Broadly speaking, the OCR determines the price of borrowing money in New Zealand overnight. This directly affects floating mortgage rates. But, importantly, expectations of where the OCR is going to head next have a strong influence on shorter-term mortgage rates out to around 2 years, which is why fixed mortgage rates don’t always move at the same time as the OCR – market expectations change every day.
Beyond about the 3-year mark, global factors become more important in determining interest rates, but New Zealand monetary policy still matters a lot too.
So the upshot is, the OCR is only one factor that determines bank lending rates, but it’s a very important one. And while the OCR and floating mortgage rates typically move very closely together, it‘s often changing expectations about future OCR decisions that cause fixed mortgage rates to go up or down.
So - why are interest rates rising?
This is due to a number of factors – but mainly because the economic conditions that have supported historically low interest rates have changed.
The historically low rates we’ve had are, in part, because of the global economic response to Covid-19.
At the beginning of the first lockdown in 2020, the RBNZ slashed the OCR by 0.75 percentage points to 0.25%. In turn, mortgage rates – as well as term deposit and savings rates – also dropped to historic lows.
Central banks in other countries took similar steps, which in turn influenced the behaviour of wholesale money markets.
The RBNZ also pumped more than $88 billion into the economy through a range of measures.
These measures – or monetary policy tools - were designed to boost confidence and encourage spending and investment, maintain employment, and support the New Zealand economy through the pandemic.
Alongside this, the Government introduced wage subsidies and other assistance for businesses.
Fast forward to today and the economic impacts of Covid-19 in New Zealand haven’t been nearly as great as was initially feared. Unemployment remains very low and, for most, the economic recovery has been strong.
The downside to this is that all of that stimulus, or cash in our economy, plus disruptions to the way goods are imported and exported, means supply of goods is struggling to keep up with demand, resulting in inflation rising faster than expected.
A rapid increase in inflation can erode the value of people’s savings and their spending power, because the cost of everyday goods and services goes up quickly – and more quickly than incomes. ANZ NZ’s economics team thinks the country’s inflation could go as high as 6-7% this year.
As well as hitting Kiwis’ hip pockets, inflation can undermine consumer and investment confidence, which in turn can harm economic growth.
The RBNZ wants to encourage sustainable economic growth and so may take measures to try and reduce inflation. By lifting interest rates through lifting the OCR, it hopes to take some of the heat out of the economy, reducing inflation and encouraging people to borrow less and save more.
You can think of it like the brakes in a car. If the RBNZ wants to accelerate economic growth it can cut the OCR, and make it cheaper to borrow, so people may spend more - burning more fuel. If it wants to slow things down it can hike rates, which can encourage people to save rather than to go out and spend – and save some fuel for another day.