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Quick Property Facts: OCR and Interest Rates

Thursday, March 08, 2012
We often get asked by newbie investors what the Official Cash Rate is and how it affects property investors.  

Leaving the nitty-gritty details to the real experts, the Official Cash Rate ("the OCR") can largely be explained thus: 

One of the key functions of The Reserve Bank Of New Zealand ("RBNZ") is to manage a sound a dynamic economy focusing one three key fundamentals: sustainable growth, stable prices, and full employment. For eight times a year, the RBNZ monitors these performance fundamentals by adjusting the OCR.  Primarily  to influence inflation, the OCR is also used to stimulate or cool the economy.  

When RBNZ lowers the OCR, Kiwi banks are encouraged to lower their interest rates on mortgages and loans in order to encourage lending.  Borrowing money becoming cheaper therefore spending and investment will increase.  There is also more money in the economy which has an effect of driving up prices.  

When RBNZ puts up the OCR, the reverse happens.  Higher mortgage, loan AND saving rates means that people are encourage to lower spending and increase saving therefore driving prices down and easing inflation.  When interest rates go up, overseas investors will be more likely to buy NZ dollars or invest here causing an initial rise in the exchange rate.  However, over time, the increase in interest rate can lower economic growth making Kiwi-Land a less attractive option for offshore investors. 

The main role of the RBNZ is to keep prices stable through inflation targeting.  The current target is to keep inflation between 1-3%.  The RBNZ is constantly gathering information about the economy and uses OCR to manage inflation. 

For us everyday folks the OCR is relevant insofar as the higher the interest rate the more conservative we have to be with our spending and the lower the interest rate the easier it is for property investors to expand our portfolios.

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