What is the OCR in New Zealand and how does it work?

The official cash rate (OCR) is set by the Reserve Bank of New Zealand. It influences interest rates across the economy. A change in the OCR can affect everything from your mortgage repayments to the returns on your investments. Understanding its implications is crucial for making informed financial decisions.

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A Look Back: OCR trends and mortgage interest rates over the last four years

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To understand the impact of the latest OCR announcement, let's take a look at how the OCR and average mortgage interest rates have changed over the past four years:

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2019: Stability Before the Storm In 2019, the OCR remained relatively stable, starting the year at 1.75%. However, as global economic uncertainties grew, the Reserve Bank lowered the OCR to 1.0% by August to support the economy. During this period, the average mortgage interest rate was around 4.5%.

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2020: Responding to the Pandemic The global pandemic brought unprecedented challenges. In March 2020, the OCR was slashed to a record low of 0.25% to mitigate the economic impact of the pandemic and to provide support to businesses and households. Consequently, mortgage interest rates dropped significantly, averaging around 3.5% to 4.0% as banks passed on the lower cost of borrowing to consumers.

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2021: Holding Steady Amid Recovery Efforts Throughout 2021, the OCR was kept at 0.25% as New Zealand navigated the economic recovery process. The focus was on maintaining stability and supporting ongoing recovery efforts. Mortgage interest rates remained low, with averages hovering between 3.0% and 3.5%.

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2022: Addressing Inflation Pressures As inflationary pressures began to mount, the Reserve Bank started to gradually increase the OCR. By the end of 2022, the OCR had risen to 2.5% in a bid to combat rising inflation and maintain economic stability. This led to a corresponding increase in mortgage interest rates, which averaged around 4.0% to 4.5% by the year's end.

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2023: A Year of Incremental Increases In 2023, the OCR continued to rise, reflecting ongoing concerns about inflation and economic stability. By mid-2023, the OCR reached 3.5%, impacting mortgage rates, which averaged between 5.0% and 5.5%.

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2024: Navigating Economic Challenges As of 2024, the OCR has seen further adjustments, reaching 4.0% amid continued efforts to curb inflation and ensure economic stability. This has resulted in an increase in average mortgage interest rates, now averaging around 5.5% to 6.0%. Homeowners and investors have felt the pinch, with higher monthly repayments and a greater need for strategic financial planning.

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How does OCR affect mortgage rates in New Zealand?

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Rate Increase: When the OCR is increased, banks typically raise their mortgage interest rates. This results in higher monthly repayments for homeowners and property investors.

For example, if you have a $500,000 mortgage at an interest rate of 5.5%, a 0.5% increase in rates could add approximately $140 to your monthly repayments. Over a year, this amounts to an additional $1,680, directly affecting your budget and financial planning.

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Rate Decrease: Conversely, when the OCR is decreased, banks usually lower their mortgage interest rates. This reduces monthly repayments, easing financial pressure on homeowners and investors

For instance, if you have the same $500,000 mortgage at 5.5%, a 0.5% decrease in rates could save you about $140 per month, totalling $1,680 in annual savings. These reductions can free up funds for other investments or expenses.

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What is the current OCR in New Zealand?

On October 9, 2024, the Reserve Bank of New Zealand (RBNZ) made another decisive move by further cutting the Official Cash Rate (OCR) by 50 basis points to 4.75%. This marks a continuation of the RBNZ's efforts to address slowing economic growth and maintain price stability, as inflationary pressures have begun to ease. The latest cut highlights the central bank’s commitment to ensuring that the country’s economic conditions remain favorable for businesses and households alike.

Implications of the OCR cut

1. Impact on mortgage rates

The OCR serves as a key reference point for interest rates across the financial system, and this latest cut is expected to have a marked impact on mortgage rates offered by major New Zealand banks. Before the cut, banks like ANZ, ASB, BNZ, and Westpac were offering 1-year fixed mortgage rates in the range of 6.19% to 6.89%. Now, with the OCR lowered to 4.75%, it’s likely that these banks will reduce their mortgage rates further, offering relief to both new borrowers and homeowners looking to refinance.

However, navigating this new lending environment requires careful planning. While lower interest rates are attractive, selecting the right mortgage product remains crucial. Here are some steps to consider:

• Evaluate your personal situation: Determine whether this is the ideal time to refinance or secure a lower rate. If in doubt - engage with an expert to help you make that decision. A Personal Financial Adviser can help you ensure that whatever you do is in alignment with your broader financial goals and specific needs.
• Mortgage product suitability: The mortgage structure you choose should fit your financial plans and long-term goals.
• Strategic alignment: Ensure that any mortgage decisions you make today remain consistent with your overall financial strategy as the market continues to evolve.

2. Effect on the housing market

With mortgage rates expected to decline, the housing market may experience renewed interest, particularly among first-home buyers who were previously deterred by high borrowing costs. While this reduction could spark more demand in the property market, broader economic uncertainty might temper any drastic market shifts.

For potential homebuyers, this could be an opportune moment to enter the market, but caution is key. Here are some factors to consider:

• Market fluctuations: Ensure that you're comfortable with the potential volatility in the housing market. Buying a home during a period of fluctuating interest rates can have long-term financial implications.
• Long-term financial planning: Make sure your home purchase fits within your overall financial strategy. Consider future rate changes and how they might impact your repayments.

3. Business and consumer spending

Lower borrowing costs are expected to stimulate business investment, as companies can finance their growth more affordably. In parallel, consumers might see reduced personal loan and credit card rates, leading to a potential uptick in retail spending. However, caution should be exercised, as the broader economic environment remains unpredictable.

As a consumer, here are some prudent actions to take:

• Budgeting: Increased spending opportunities should not come at the expense of your long-term financial objectives.
• Debt management: If you carry high-interest debt, now may be an ideal time to consider consolidating or refinancing. Look for the best financing options that could arise in light of the OCR cut.

4. Currency and inflation dynamics

A lower OCR may lead to a weaker New Zealand dollar, making exports more competitive on the global stage, but it could also push up the cost of imports. This could introduce inflationary pressure, though the RBNZ appears confident that inflation will remain under control. The possibility of further OCR cuts down the road cannot be ruled out, especially if economic conditions warrant additional stimulus.

Looking ahead

This latest OCR cut to 4.75% reflects the RBNZ’s ongoing efforts to balance economic growth with price stability. As mortgage rates adjust and consumers recalibrate their spending habits, New Zealand’s economic landscape will undoubtedly shift. For both borrowers and investors, this is a critical moment to reassess their financial strategies, ensuring they make informed decisions in a rapidly changing environment.

When is the next OCR announcement in 2024?

Staying informed about OCR changes is crucial for effective financial planning. 

The OCR is reviewed 7 times a year. At the time of writing this article, the next OCR announcement for 2024 is scheduled for 27 of November 2024. 

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In times of economic uncertainty, having a robust, long-term financial plan becomes even more critical!

At MyFuture, we know that understanding the impact of the OCR on your finances can be daunting. That's why we offer a free, no-obligation Discovery session to discuss your unique financial goals and to help you understand what your options are in the current market.

 Our expert advisers are here to provide clarity and confidence, guiding you through these uncertain times with tailored holistic financial advice across KiwiSaver savings, managed funds, mortgages, investment property, and insurance. Our goal is to ensure you are on the path to achieving your short and long term financial goals. We're committed to helping you thrive in any economic climate! 

Ready to unlock your financial potential?  Book your free Discovery call with MyFuture today to take the first step towards a secure financial future and discover the difference expert advice can make!

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