What is the OCR and how does it affect our lives?

Source: 1News

The Reserve Bank yesterday hiked the OCR to 4.25%. It's big news - but what does it actually mean?

What does OCR stand for?

Well, OCR stands for the official cash rate.

It’s the interest rates set by The Reserve Bank of New Zealand (RBNZ), which is the banker for our commercial banks such as ANZ, ASB, BNZ and Westpac.

The OCR is reviewed seven times a year.

Why is OCR important?

OCR is a tool used to influence economic activity and help keep a lid on inflation, which is the general increase on the price we pay on everyday items like bread and milk.

The current rate of inflation is 7.2%, which is high.

What does OCR affect?

OCR generally effects what people do with their money, between splashing out and spending, borrowing and saving.

How does it do this?

When the OCR goes up, commercial banks like ASB will generally increase their interest rates they charge on your mortgage, credit cards and other loans.

It also means, however, you will earn more on your savings accounts, encouraging people to save rather than spend.

The general theory is when the OCR rises, it costs more to borrow money, encouraging people to save rather than spend.

With consumers buying less, demands for goods drops, business become more competitive, which can result in lower prices and a drop in inflation.

Official cash rate graphic