Understanding the OCR
Why Every Kiwi Homeowner Should Pay Attention
As a home loan adviser, one of the most common questions I get is: "What’s happening with interest rates?" The answer often starts with something called the Official Cash Rate (OCR) - a powerful lever used by the Reserve Bank of New Zealand (RBNZ) that directly affects your mortgage.
In this article, I’ll break down what the OCR is, how it works, why it matters to you as a homeowner or homebuyer, and what “forward guidance” from the RBNZ actually means.
What is the OCR?
The Official Cash Rate (OCR) is the interest rate set by the RBNZ, currently reviewed seven times a year. It’s the rate at which commercial banks borrow and lend money to each other overnight. While that might sound far removed from your home loan, it’s actually the starting point for setting short term retail interest rates - including those on your mortgage.
Think of the OCR as the benchmark that banks use to price the cost of borrowing. When the OCR goes up, borrowing generally becomes more expensive. When it goes down, it gets cheaper.
How Does the OCR Affect Your Home Loan?
Here’s how changes in the OCR typically flow through to your mortgage:
Floating or variable rates: These usually respond quickly to OCR changes. If the OCR increases, your interest rate - and your repayments might go up within weeks.
Fixed rates: These don’t change during the fixed term, but new fixed-term offers reflect market expectations of where the OCR is heading. So, if a hike is expected, you might see fixed rates rise even before the OCR actually moves.
Practical Example:
If the RBNZ raises the OCR by 0.25%, banks may pass that on to borrowers. On a $500,000 mortgage, even a 0.25% rise could mean hundreds more in repayments each month.
Why the OCR Changes
The RBNZ adjusts the OCR to maintain price stability (targeted inflation of between 1 and 3%) and support sustainable employment - its dual mandate. The main driver behind OCR changes is inflation.
If inflation is too high, the RBNZ might raise the OCR to slow down spending.
If inflation is too low or the economy is weak, it might cut the OCR to encourage borrowing and investment.
Understanding Forward Guidance: A Key Tool for Mortgage Planning
When it comes to interest rates, it’s not just about what the Reserve Bank of New Zealand (RBNZ) does today - it’s also about what they expect to do next. That’s where forward guidance comes in.
If you’re a homeowner or planning to buy, keeping an eye on forward guidance can give you a valuable edge. It helps you anticipate where interest rates might be headed, so you can make smarter decisions about when to refix your loan, choose between fixed and floating, or even fast-track a property purchase.
What Is Forward Guidance?
Forward guidance is how the RBNZ communicates its expected future path for the Official Cash Rate (OCR). It’s not a fixed plan, but a projection based on the current state of the economy - things like inflation, employment levels, and global risks.
By sharing its outlook, the RBNZ gives borrowers, banks, and investors a chance to plan ahead, rather than being caught off guard when interest rates change. For you, that means more control over your mortgage strategy and financial decisions.
Where Can You Find It?
Forward guidance is publicly available and updated regularly through RBNZ's key publications:
Monetary Policy Statement (MPS)
When: Released quarterly (Feb, May, Aug, Nov).
Where: rbnz.govt.nz
What to Look For:
The OCR forecast track (a graph showing projected future OCR levels)
Statements from the Governor explaining the reasoning behind current and future rate expectations
Commentary on inflation, employment, and the economic outlook
Official Cash Rate Review Announcements
When: Seven times per year (the four MPS releases plus three interim updates)
Where: Also on rbnz.govt.nz and widely reported in business news outlets
What to Look For:
Short-term commentary on whether the OCR is being held, raised, or lowered
Hints about the RBNZ’s future moves (“the committee agreed that further tightening may be needed…”)
Press Conferences & Media Interviews
After each MPS, the RBNZ Governor holds a press conference. Media coverage often pulls out key quotes that signal intent - these are great for reading between the lines.
Why You Should Understand the OCR
Better Timing: Knowing when rates are likely to change can help you time your refixes or decide between floating and fixed options.
Strategic Borrowing: If you understand OCR trends, you can choose loan structures that match your financial goals and risk tolerance.
Peace of Mind: You’ll feel more in control of your finances when you understand why your repayments are changing and what might happen next.
Final Thoughts
While there's no need to become an economist, having a basic understanding of the Official Cash Rate (OCR) and how it's used by the Reserve Bank of New Zealand (RBNZ) can provide an advantage when managing a home loan. Understanding how interest rate decisions may impact individual circumstances is key to making informed choices. A well-structured loan can help provide stability and flexibility, no matter what the market brings.