What's the OCR and why should you care?

You've probably heard about the Official Cash Rate (OCR) and thought, "That sounds dreadfully boring." The reality is that understanding it could be the key to getting more out of your money - because no matter how boring it might seem, it affects nearly every part of your financial life! 

Here’s what you need to know (and only what you need to know).

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What on Earth is the Official Cash Rate (OCR)?

Picture this: The OCR is like the heartbeat of New Zealand's economy, setting the rhythm for our finances. The Reserve Bank of New Zealand acts as a conductor, setting the tempo by adjusting the OCR, which is the interest rate it charges on overnight loans to commercial banks.

Why should you care? Banks use the OCR as a guide when deciding the interest rates they charge for loans or pay on savings. The Reserve Bank adjusts the OCR to keep inflation – the rate at which prices for goods and services increase – in check. This way, it ensures our economy doesn't go off the rails, affecting jobs, businesses, and our overall financial well-being.

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What this means for your money

When the OCR goes up, it becomes more expensive for banks to borrow money from the Reserve Bank. Think of it as your bank's version of a "parental allowance cut." They can’t get as much money from Mum & Dad so they can’t spend (lend) it out as cheaply either.

This often leads banks to increase the interest rates they charge on loans (like mortgages, personal loans, and credit cards) to cover their increased costs. It also prompts them to raise the interest rates on savings accounts to attract more deposits. Better rates, better savings, more money for them to be able to lend out.

When the OCR goes down, borrowing money from the Reserve Bank becomes cheaper. They often pass on these savings by lowering interest rates on loans, making it more affordable for people to borrow. However, they may also reduce the interest rates they pay on savings accounts, as they can now access cheaper funding.

Keep in mind, though, that banks may not always change their interest rates by the same amount as the OCR change. Just like we have our individual quirks, banks do too. Factors like competition, funding costs, and the overall economic environment can influence how banks adjust their interest rates.

Example

In 2020, the Reserve Bank cut the OCR to from 1.00% to 0.25% - the lowest it has ever been - in response to COVID. This made it cheaper for banks to lend money, so all of the major banks cut their rates to stay competitive. People were able to lock in fixed home loan rates of about 2%p.a., while variable rates were super low too.

Meanwhile, over 2022 and 2023, the OCR steadily went back up to around 5.00% (at the time of writing). As a result, lenders started putting their own rates back up too, making loans more expensive. At the time of writing, fixed-rate home loans are closer to 7%p.a.

The short version: 

1. When the OCR goes up, borrowing money* can become more expensive, but savings** rates are better. 
2. When the OCR goes down, borrowing money can become less expensive, but savings rates are worse.
3. Banks don’t always change their interest rates by the same amount that the Official Cash Rate changes.

*This includes credit cards, mortgages, personal loans, car loans, and so on.

**This includes savings accounts of all kinds & term deposits

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How is the OCR set?

Setting the OCR isn't just a random decision made over a cup of tea. The Reserve Bank has a group called the Monetary Policy Committee (MPC) that takes on this serious task. The MPC studies things like inflation, jobs, and the economy before deciding on the OCR. 

They typically decide on the Official Cash Rate 7 times a year, though they can change it at will during extreme moments (like they did during COVID in 2020).

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Staying Informed and Adapting to OCR Changes

• Become a news junkie (the financial kind): Keep an eye on financial news and websites to stay updated on OCR changes. You'll not only impress your friends with your newfound knowledge but also be ready to react when the OCR changes.
• Treat your budget like a game: OCR changes can affect your interest rates on loans and savings accounts. When this happens, revisit your budget and make adjustments like a pro.
• Reevaluate your savings goals with gusto: If the OCR affects your savings interest rates, it's time to get creative with your savings goals. Explore new saving options or adjust your targets – turn it into a financial adventure!
• Tame the debt monster: When the OCR increases and causes higher interest rates on loans and credit cards, face the debt monster head-on. Create a plan to reduce your debt and celebrate your progress along the way.
• Diversify your investments like a financial artist: Think of your investment portfolio as a masterpiece. The OCR can influence the performance of various investments differently, so diversify across different asset classes, industries, and regions to create a well-rounded, resilient portfolio.
• Keep an eye on fixed-rate loans like a hawk: If you have fixed-rate loans, watch for when they're due to roll over. Compare current interest rates to your existing rate as the end of the fixed-rate term approaches, and make informed decisions when it's time to refinance or switch.
• Chat with a financial advisor: If you're unsure about how OCR changes affect your finances, consider speaking with a financial advisor. They're like your personal financial coach, offering tailored advice for your unique situation.

By staying informed about the OCR and adapting to changes, you'll be better equipped to handle any financial challenges. Money is mahi, and by taking the time to master the OCR and how it affects you, you’re prepping yourself and your family for what comes next in your financial journey.

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This was originally posted as an education article on the Money Sweetspot customer portal. If you read this as one of our customers, you would've earned some money off your loan! Do the mahi, get the treats. Find out more.

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