What is the OCR and how does it work?

What is the OCR?

The OCR is essentially the interest rate that the RBNZ charges commercial banks when they borrow money from the central bank. Commercial banks need money to operate and provide loans to businesses and individuals. When the RBNZ adjusts the OCR, it affects the cost at which banks can borrow money.

Now, why does the RBNZ change the OCR? Well, the primary goal is to achieve certain economic objectives. One important objective is price stability, which means controlling inflation. The RBNZ wants to keep inflation within a target range (typically around 2%). By adjusting the OCR, the RBNZ can influence interest rates throughout the economy, which in turn affects spending and borrowing decisions.

When the RBNZ lowers the OCR, it encourages commercial banks to borrow more money because it becomes cheaper for them. As a result, these banks can offer loans to businesses and individuals at lower interest rates. This stimulates borrowing, spending, and investment, which can help boost economic activity and employment.

Conversely, if the RBNZ raises the OCR, borrowing becomes more expensive for commercial banks. This leads to higher interest rates on loans offered by banks, which can reduce borrowing, slow down spending, and help control inflation. The RBNZ might choose to increase the OCR if it believes the economy is growing too fast, which could lead to excessive inflationary pressures.

How does it impact the housing market?

Good question! Here's a brief outline of 5 ways the OCR can impact the housing market:

1. Mortgage Interest Rates: The OCR influences the interest rates that commercial banks charge for mortgages. When the OCR decreases, banks can borrow money at a lower cost from the Reserve Bank, allowing them to offer lower interest rates on mortgages. Lower interest rates make borrowing more affordable, which can encourage people to take out mortgages to buy homes. This increased demand can contribute to rising housing prices.
2. Affordability: Lower interest rates resulting from a decreased OCR can make housing more affordable for prospective buyers. With lower mortgage rates, people may be able to qualify for larger loans or have lower monthly mortgage payments, making homeownership more accessible. However, if the demand for housing increases significantly due to lower interest rates, it can drive up prices and impact affordability negatively.
3. Investor Activity: When interest rates are low, investors may be more inclined to invest in the housing market. Lower borrowing costs can make property investment more attractive, potentially driving up demand for investment properties. This increased investor activity can contribute to rising house prices, particularly in sought-after areas.
4. Construction and Development: The OCR can also impact construction and development activity in the housing market. Lower interest rates can incentivise developers to undertake new construction projects because financing becomes more affordable. This can lead to increased housing supply, which may help moderate price growth or address housing shortages in certain areas.
5. Economic Conditions: Changes in the OCR can influence broader economic conditions, which, in turn, can affect the housing market. For example, if the RBNZ raises the OCR to control inflation or manage economic growth, it can lead to higher borrowing costs for banks and subsequently higher mortgage rates. This can reduce housing demand and slow down price growth.

It's worth remembering that while the OCR is a significant factor, it's not the sole determinant of housing market dynamics.

To find out what the OCR is today, click here!