In the news: Official Cash Rate (OCR). But what is it?

March 2024: In the news there has been talks about the Reserve Bank of New Zealand and what potential changes to the Official Cash Rate (OCR) could mean for us kiwi.

Let’s break it down!

What is the Reserve Bank of New Zealand?

Imagine if the Reserve Bank of New Zealand was like a school's principal. Instead of watching over students, they watch over our country's money. They make changes, and those changes influence our money.

One change (or lack of change) the Reserve Bank of New Zealand recently decided was to keep the playground rule, known as the official cash rate (OCR), steady at 5.5%.

What does ‘Official Cash Rate (OCR)’ mean?

The OCR influences how much it costs us and businesses to borrow money (interest) for big things, like buying property or investing in new ventures.

Imagine the OCR as the rules the principal sets on how fast you can run around the playground. When the rules are strict (a high OCR), it's like the principal telling everyone to slow down, making sure the playground doesn't get too chaotic.

This slower pace makes students think twice before they run around, similar to how higher interest rates make people and businesses consider carefully before borrowing money for big purchases.

When the rules are relaxed (a low OCR), it's like the principal saying it's okay to run a bit faster, encouraging a flurry of activity and games. This freedom makes it easier for students to move around, join different games, and start new activities. Just as lower interest rates make it more affordable for people to borrow money, encouraging them to buy more and invest in new ventures.

They've decided to keep the pace moderate for now, urging us to be a bit more cautious with our financial 'running around'. This helps to ensure that the 'speed' of inflation, or the rising prices of things we want like houses, doesn't get out of hand.

Finding the right pace for the playground is a delicate task. If the rules are too strict for too long, it can tire out those who are already playing (people with loans might find it hard to manage). But if the playground rules are too lax, the place might become too wild, with everyone running amok (prices of goods, like houses, might rise too quickly).

It's up to the Reserve Bank to keep adjusting the rules, aiming for a balance where everyone can enjoy the playground without causing chaos.