New Zealand’s Official Cash Rate is likely to hit a peak of 5%, down from a previous forecast of 5.5%, according to BNZ economists.

BNZ Chief Economist Mike Jones predicts that the global gloom was set to lift with evidence pointing to the Reserve Bank moderating its approach to interest rate hikes.

BNZ reports that there is confidence that inflation has peaked, and labour market pressures were turning, with 75 basis points (bps) worth of additional official cash rate increases this year, which was a drop from 125bps previously.

How does the Official Cash Rate work?

The Official Cash Rate (OCR) is the key monetary tool used by the Monetary Policy Committee and it is reviewed seven times a year.

The committee’s role is to set monetary policy to contribute “to public welfare by supporting maximum sustainable employment while maintaining price stability over the medium term.”

Described as the bank for the commercial banks, most registered banks have settlement accounts with the Reserve Bank of New Zealand.

These are used for inter-bank transactions.

Modifications to the OCR extend through to the interest rates that banks pass on to consumers and businesses.

This then flows on to mortgage or savings rates.

Hence, if the OCR is raised banks tend to increase their rates. The reason behind this is because the OCR influences the banks’ costs.

As with any typical business, increased costs are passed on in the central bank’s prices. On the other end of the spectrum, if a bank’s interest rates are decreased, people tend to spend more because the cost of borrowing money is cheaper due to the lower rate.

And savings accounts are less appealing due to the decline in returns.

Inflation, employment, and economic activity pressure increases when consumers spend more and save less mosey.

The opposite takes place when the OCR is increased with banks following suit with interest rates.

[i] https://blog.bnz.co.nz/2023/02/the-worm-turns

[i][i] https://www.rbnz.govt.nz/education/explainers/the-official-cash-rate-explained