![]() The target range for the inflation rate is 1%-3% per annum, and right now, it is at 7.3% (not the Reserve Bank’s fault - the world has gone through some crazy shit). This gives the Reserve Bank a measure of control over inflation rates. Quite simply, when interest rates rise, people spend less when they drop, people spend more. The Reserve Bank reviews interest rates seven times a year and may adjust the rate to influence economic activity. A decrease in demand reduces pressure for prices to rise, therefore reducing inflation. When people spend less, demand decreases. The OCR increase creates an increase in interest rates, which means people borrow less and are incentivised to save. Why did it increase?īecause of inflation. Understanding the reasoning behind it might give you peace of mind and feel a little less like everything is flying out of control. So, as far as day-to-day life goes, the OCR increase has good and bad effects, depending on how you look at it. ![]() Foreign rates play a role in NZ’s interest rates regardless of what the OCR does, because NZ is a net borrower in overseas markets. It's worth mentioning that the OCR is not the only factor influencing interest rates. As the saying goes, the best time to start was yesterday. If you don’t have savings, it is never too late to start. This is where it pays to have savings and investment accounts up and running to take advantage of the increase. The interest rate on savings accounts and term deposits will also increase, so you essentially get paid more for saving. Check out our articles on first-home buying to ensure you don’t miss out on any opportunity you could be eligible for. It might feel like first-home buyers keep taking a hit, but there are still many options that can help you get into your first home. While recent data shows house prices are coming down, rising interest rates mean the average income needed to buy a home is now $142,000, which is $7,000 more than in November of last year. If you are trying to buy your first home - you’ll need more money.Some will feel that extra pinch more than others, and remember, this is on top of the OCR increases over the past year - so your mortgage payment might look quite a lot different compared to a year or so ago. To get an idea of what this looks like, a $600,000 floating mortgage might see an increase of $60 due every week. Home-owners with a floating mortgage can expect their payment amount to increase now. The biggest impact is on short-term interest rates, like floating mortgage rates. Interest rates for mortgages and other loans will increase.Like any other business, they pass that extra cost on to their customers. Now, what does it matter to everyday Kiwis if the OCR changes? What does an OCR increase mean?Īn increase means the banks are paying more interest to borrow from the Reserve Bank. There is no limit to what the Reserve Bank lends or borrows at OCR-related rates, so banks don’t run out of money and you and everyone else can keep on spending and saving. The Reserve Bank covers the difference by either paying interest (if the bank is in credit) at a rate 0.25% lower than the OCR, or charging interest (if the bank is in debit) at a rate 0.25% higher than the OCR. (If you ever worked retail, now you know what that end-of-shift “settlement batch” is all about.)Įvery day, each bank is either in credit or debit. At the end of each day, the transactions are settled so each bank knows what it owes to other banks. This happens thousands of times a day, obviously. When you use your EFTPOS card, money moves from your bank to the bank of whoever you are paying. It is a tool used by the Reserve Bank to influence economic activity and inflation. The OCR is the interest rate for transactions between banks. I started BetterSaver to make financial advice accessible to Kiwis, so I’ll break it down in plain terms so you know what to expect. But it is an important change and one that you want to be aware of. Sound like financial mumbo jumbo? I get that. The Reserve Bank recently announced an increase in the official cash rate (OCR) to a seven-year high of 3%.
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