OCR cut to 4.75%

The reserve bank has cut the official cash rate by 50 basis points to 4.75%.

The official cash rate is set by the reserve bank monetary review. This sets the cost that banks incur to borrow money from the reserve bank.

These were previously called OCR (Official Cash Rate) announcements. This was changed to Monetary Policy Review (MPR) announcements as of 23 June 2020.

The higher the OCR goes, the more costly the interest expense on borrowings become. This reduces the amount of money that can be borrowed for a home loan as banks increase the rates. Businesses also find it more expensive to operate. This can lead to being less inclined to spend money to grow their business. Layoffs and the deferral of capital expenses are common when interest rates are increasing. This in turn results in people spending less and increases the uncertainty of how much revenue they have going forward.

Cuts to the OCR aim to increase the amount of spending in the economy. The reserve bank waits until they see signs of inflation coming down before making changes to the OCR. Business and consumer confidence are also lower at this point as financial pressures mount. 

Decisions on whether the OCR should be raised, lowered or remain the same occur 7 times a year.

The reserve bank’s target is to have inflation between 1-3% in the medium term. 

The reserve bank raised the OCR to 5.5% in May 2023 to get inflation down.

The consumer price index (CPI) shows an annual change in inflation to the June quarter of 3.3%. CPI figures have drifted lower since the December 2022 quarter where annual CPI was at 7.2%. The CPI update for the September quarter will be made on October 16.

Due to the time it takes for all OCR movements to flow through the economy, the cut made today will not affect everyone immediately. People with fixed term mortgages will need to wait until they can refix before they will see savings.

The reserve bank has gone for a 50 basis point adjustment which is above the usual 25 basis point movement. This indicates they are confident that lowering the OCR now will not cause inflation to rise in the short term. 

If businesses believe the economy is going to be growing again, they can more confidently invest in their business. This will see decisions made now being based on having a brighter outlook of the economy going foraward.

The official unemployment rate in NZ for the June quarter was 4.6%. An update for the September quarter will be on November 6. We expect the unemployment figures to have gotten worse over this time. 

By cutting the OCR by 50 basis points, it’s a clear signal that the reserve bank is wanting to loosen the reins on the economy. They will be confident they can achieve their inflation targets and want to ensure the economy doesn’t stall. They will continue to take steps to encourage the economy to keep moving without causing too much financial pain.

Links to the Reserve Bank, CPI & unemployment figures

https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/the-official-cash-rate

https://www.stats.govt.nz/indicators/consumers-price-index-cpi

https://www.stats.govt.nz/information-releases/labour-market-statistics-june-2024-quarter