Reserve Bank Retains Official Cash Rate at 5.5% Amid Expectations of Eventual Drop

Date Published: 29 February 2024

Key Facts

• The Reserve Bank maintains the official cash rate (OCR) at 5.5 percent.
• The OCR influences the borrowing costs for lenders and thus affects mortgage rates.
• Keeping the OCR high controls unnecessary spending and reduces inflation pressures.
• Despite high debt levels, the cost of servicing mortgages is relatively manageable compared to past years.
• The Reserve Bank’s goal is to lower inflation to 1-3 percent within the next few years.
• The Reserve Bank’s decision to focus solely on inflation, disregarding employment rates, has had no significant effect on OCR decisions.

Article Summary

The Reserve Bank announced it is keeping the official cash rate (OCR) at 5.5 percent, the highest level since the global financial crisis of 2007/8. This rate directly affects borrowing costs for lenders and influences mortgage rates. When the OCR is high, it counterbalances discretionary spending, cools the economy, and lessens inflation threats.

Economist Bernard Hickey answered some questions on the subject, highlighting that most New Zealand families and aspiring homeowners are focusing a significant part of their energies on owning residential property. Even with high debt levels, the burden of servicing mortgages is relatively easier now than in 2007/8. This is due to lower interest rates and loan to value ratio (LVR) controls, which have successfully mitigated household debt ratios since 2011/12.

The Reserve Bank’s mandate has shifted back to focusing only on inflation. Although this move disregards the need to consider employment rates, it has not significantly affected OCR decisions. Lastly, the Reserve Bank aims to bring down inflation to within their target range of 1-3 percent within a few years. Despite some predicting a possible rate hike, financial markets foresee a drop in the OCR later this year.

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