In their most recent review, the Reserve Bank announced a reduction of the OCR to 3.25%.

So, how did they come to that decision?

And what goes into the rationale behind deciding what the cash rate should be?

Let’s take a look at what the Reserve Bank discusses at an OCR review.

What Does the Reserve Bank Review?

As you can imagine, there is a lot that goes into balancing the economy and ensuring the conditions are favourable for everyday Kiwis! So, these are the aspects that the Reserve Bank explore when making any decision about the OCR:1. 

1.Inflation

We hear a lot about inflation every time an OCR review rolls around. The Reserve Bank always aim to keep the inflation rate within 1-3%, targeting a midpoint of 2%. Keeping inflation within this band helps to keep NZ’s economic environment healthy and predictable. When inflation rises above this figure, things can become unstable, restricting the potential for growth and investment.

So, a big focus of an OCR review is current inflation trends and forecasts. This can help determine whether monetary policy needs to be tightened (raising the OCR) or loosened (cutting the OCR). Because inflation is currently under control, it helps to support the current trend of an OCR reduction at each review.

2. Unemployment

High unemployment levels can have a negative impact on NZ’s economy. When people are not working, they have less money to spend, potentially restricting overall economic growth. Also, when fewer people are earning, it puts pressure on government finances as less tax revenue is collected, and people may even require economic support from the government.

This can put a strain on government budgets and can even limit their investment in vital things like infrastructure, health and education. So, it stands to reason that the Reserve Bank keeps a close eye on unemployment levels to ensure they stay within a sustainable range.

3. Economic Growth

Is the economy growing at a healthy pace or showing signs of slowing down? This is another thing the Reserve Bank will review. They monitor key metrics like GDP growth rates, business confidence levels and consumer spending to see how the economy is performing.

Steady growth in these areas indicates a healthy economy, whereas low or negative growth shows the economy is slowing or shrinking. Monitoring these things will also help with forecasting inflation and unemployment trends. This allows them to decide whether the OCR should be raised or lowered to support healthy growth.

4. Global Conditions

Because New Zealand’s economy relies heavily on trade, international happenings can significantly impact our economy and the decisions the Reserve Bank makes. By keeping an eye on global events, financial market volatility, global inflation and commodity prices, it gives the Reserve Bank a good indication of what is happening around the world and whether it needs to do anything to combat emerging trends. 

5. Housing Market

The Reserve Bank will also pay close attention to house pricing, housing supply and credit growth. When house prices get excessively high compared to income or when rapid lending starts to take place, it can pose a risk to financial stability. Obviously, that isn’t a good thing when the economy is concerned.

Part of monitoring housing is assessing how easily households and businesses can access lending and what credit conditions are. If house prices are blowing out, lending is tightening too much or expanding too rapidly, then the Reserve Bank may adjust the OCR to maintain balance. 

Where Is The Economy Currently Sitting?

When the Reserve Bank undertakes an OCR review, it is interesting to look at their commentary along with the decisions made. The commentary can give an indication about what to potentially expect in the future. So, let’s take a quick look at what came out of the most recent review.

• Inflation: Inflation remains within the 1-3% band that the Monetary Policy Committee have been targeting. While inflation expectations have increased, there is “spare productivity capacity” in the economy, so monetary policy does not need any tightening.
• Economy: “Elevated export prices and recent reductions in the OCR are expected to support a modest pace of growth in the New Zealand economy, even as increased global tariffs are expected to slow global economic growth.” [source]
• Global Climate: Global economic activity is not looking as great as was initially projected earlier in the year. This is largely due to downward growth projections from China and the USA as a result of their tariff war. Unfortunately, it’s also creating a lot of uncertainty in the global market, so there is an element of volatility for the RBNZ to be mindful of going forward.
• Economic Recovery: Elevated export prices and lower interest rates are doing a good job of supporting positive economic activity. As the full effects of the OCR cuts have not yet been felt, the RBNZ are hopeful that our economy is modestly recovering.
• Financial System Stability: The average interest rate across all mortgages has recently reduced and should continue to reduce, with half of the current mortgage stock due to refix to lower rates before the end of the year. Non-performing loans had increased in line with the recent contraction of the economy, but the banking system is still in a strong financial position to support its customers. None of this should impact monetary policy at this stage.
• Alternative Domestic Scenarios: Currently, there are multiple scenarios for how global pressures could impact the NZ economy. It may cause greater inflationary pressure, or alternatively, lower global investment could result in lower inflationary pressure. These two scenarios would clearly impact the domestic economy in different ways. It highlights the importance of continued monitoring from the Reserve Bank in the coming months and developing monetary policy accordingly.

What Does It Mean For Your Mortgage?

As is our advice every month, the best thing to do is to speak with a trusted advisor about your current and future lending.

It is expected that interest rates will slightly decrease as a result of the recent OCR reduction, but are unlikely to reach the low rates of the post-Covid wave. Careful consideration of your financial goals and future plans is needed before locking anything in.

The team at Mortgage Suite would welcome the opportunity to discuss your next financial move. Whether you are refixing your current mortgage, exploring if there is a better mortgage structure for you, or considering new lending, we are here to provide honest and practical advice.

Chat with our team now.