The Official Cash Rate (OCR) Explained
As of 19th February 2025, the Official Cash Rate (OCR) in New Zealand sits at 3.75%—a figure that holds more influence over your finances than you might think. Whether you’re applying for a mortgage, refixing your rate, or considering a term deposit, the OCR plays a central role in determining how much you’ll pay—or earn—on borrowed or saved money.
Let’s unpack what the OCR is, how it works behind the scenes, and why even a small change can ripple through the entire economy.
What Is the OCR?
The Official Cash Rate is an interest rate set by the Reserve Bank of New Zealand (RBNZ). It’s the rate at which banks lend and borrow overnight from each other via their settlement accounts at the Reserve Bank.
That might sound like a technical detail—and it is—but this base rate essentially sets the tone for all other interest rates in the country. Floating mortgage rates, term deposit returns, personal loans, and business lending are all affected by where the OCR sits.
The OCR is reviewed seven times a year, and on four of those occasions, the Reserve Bank also releases a Monetary Policy Statement explaining the reasoning behind any change.
How Does the OCR Work?
Banks in New Zealand hold settlement accounts at the Reserve Bank. These accounts help them manage thousands of transactions each day. At the end of the day, some banks will be in surplus, others in deficit—so they lend or borrow from each other to balance things out.
The Reserve Bank guarantees it will borrow and lend as much as needed, but only within a narrow range of the OCR:
Banks borrow from the Reserve Bank at OCR + 0.25%
Banks deposit surplus funds at OCR - 0.25%
This system keeps overnight lending rates tightly aligned with the OCR. Since banks use these overnight rates as part of their own cost structure, the OCR has a strong influence on the rates they offer customers—especially short-term and floating interest rates.
How the OCR Affects Mortgage Rates
The OCR has the most immediate impact on floating and short-term fixed mortgage rates. If the OCR rises, banks’ cost of borrowing increases—and they pass that cost on to consumers via higher mortgage and lending rates. Conversely, when the OCR is lowered, interest rates tend to follow.
However, longer-term fixed rates are also influenced by global financial markets. New Zealand banks often borrow money overseas to fund lending. If overseas rates are rising—even if the OCR stays put—our local fixed mortgage rates may rise too.
This is why fixed mortgage rates don’t always move in perfect sync with OCR changes.
The OCR and Inflation Control
Beyond banking mechanics, the OCR is a key tool for controlling inflation.
Higher OCR = higher interest rates = reduced borrowing and spending
Lower OCR = lower interest rates = increased borrowing and spending
When inflation rises above the target range, the Reserve Bank may increase the OCR to make borrowing more expensive and encourage saving over spending. This cools demand and helps reduce inflationary pressure.
On the flip side, when the economy slows down (or during a recession), the Reserve Bank may cut the OCR to stimulate activity and support growth.
The Reserve Bank’s Inflation Mandate
The Reserve Bank operates under the Reserve Bank of New Zealand Act 1989, and its core mission is to maintain price stability.
This goal is reinforced by the Policy Targets Agreement (PTA) signed with the Government. The PTA currently defines price stability as CPI inflation between 1% and 3% per annum, aiming for a midpoint of 2% over the medium term.
The CPI (Consumers Price Index) tracks the cost of a fixed basket of 690 goods and services—everything from groceries to rent to electricity. If these costs rise too quickly, the Reserve Bank is expected to act.
The OCR and the Exchange Rate
Changes to the OCR can also affect New Zealand’s currency. When our interest rates rise, overseas investors may be attracted to the higher returns, buying NZ dollars to invest here. This increases demand for the NZD, pushing up its value.
While a stronger dollar makes imports cheaper (and helps curb inflation), it also makes our exports more expensive, which can reduce overseas demand for NZ-made products.
Why Mortgage Borrowers Should Watch the OCR
If you’re a homeowner—or planning to become one—the OCR should be on your radar.
A rising OCR can:
Push up floating and short-term fixed mortgage rates
Reduce your borrowing power when applying for a mortgage
Increase your regular repayments if your loan isn’t fixed
A falling OCR, meanwhile, may offer an opportunity to refix at a lower rate or to repay your mortgage faster while rates are lower.
Either way, knowing when the next OCR announcement is due (and keeping an eye on inflation trends) can help you plan your finances and make more strategic mortgage decisions.
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