The Reserve Bank of New Zealand to raise Official Cash Rate to 1.25% in April

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What will be the expected rate of increase in the Official Cash Rate by RBNZ?

The interest rate is a measure of the cost of borrowing. The Reserve Bank’s Official Cash Rate (OCR) is the benchmark interest rate in New Zealand. It influences other interest rates, such as mortgage rates and business lending rates.

Interest rates are low now, but we expect them to rise over time, with a gradual rise in OCR expected from 1 March 2021 to 6 June 2022. Rates will then stay steady for about two years before returning to lower levels for around 10 years or so.

The OCR is an instrument of monetary policy, used to manage inflation

To understand what this means for you, think about what the cost of borrowing might be in your circumstances. An OCR rate of 1 per cent means that the Bank is saying that if you borrow $100 for a month, you should expect to pay 1 per cent interest on top. The cost of borrowing over a year will be (100 x 1) + (100 x .01) = $1. A year from now it will be different again: (101 x 1) + (102 x .0099) = $1.

The Bank sets the OCR to control inflation, as measured by the consumer price index (CPI). Inflation affects households and businesses in many ways. As a shopper, your costs would rise if prices increased. For example, if your shopping basket cost $100 last year and the cost of each item rose by 3 per cent in a year, you would pay $103 for those same items today. And if prices fall, you will be able to buy them for less than you could earlier on. So lower inflation is good news for households because they can buy things cheaper.

What are the reasons for trusting the Reserve Bank of New Zealand?

The Reserve Bank is independent of the government. It acts in the public interest, not for anyone’s political party or government. For two hundred years it has worked to keep the OCR low, to help support the New Zealand economy through times of economic hardship and inflation.

The Bank’s primary objective is price stability, which means keeping inflation as low as possible while maintaining sustainable growth in the economy and employment.

But real wages have been declining for a long time (see chart below), and we think this trend has probably been exacerbated by the recent downturns in dairy prices which have dampened consumers’ spending power. This should be taken into account when deciding on whether to increase rates from 1 March 2021 onwards.

What are the important decisions taken by the Committee recently?

The Bank believes that recent low inflation has been due to supply-side factors and will persist into the foreseeable future, so it is appropriate to keep the OCR low. We expect it to remain low for some time.

At its meeting on 30 November 2018, the Bank decided to keep the Official Cash Rate (OCR) at 1.75%, unchanged since March 2019, and leave existing settings unchanged over the coming three months. The Bank’s Monetary Policy Committee (MPC) has also recently decided to keep the Term Deposit Rate (TDR) at 1.55%.

The TDR is the interest rate banks pay on certain fixed deposits and term deposits, but it does not necessarily relate to the stance of monetary policy. It reflects current market conditions, especially longer-term funding conditions, rather than any change in Reserve Bank policy. The decision to keep the OCR and TDR at current settings is linked to our view of expected inflationary pressures over the coming year. We expect very low inflation for a long period.

Will keeping your hard-earned money in RBNZ prove fruitful in the long run?

If you are thinking about where to invest your hard-earned money, considering the Reserve Bank might be a sensible option. It’s been doing its job for nearly 200 years now. As long as you’re comfortable with the potential for lower returns than private sector investments and don’t mind the risk, then keeping your money in RBNZ could be a smart move. The bank is obligated by law to aim for price stability. RBNZ aims to keep inflation under control so that New Zealanders have stable money and do not have to worry about the value of their savings diminishing over time.

The Reserve Bank is independent of government but works in the public interest. For example, it has been keeping the OCR low to support the New Zealand economy through times of economic hardship and inflation. In recent years it has been successfully doing this.

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