Reserve Bank cuts OCR to record low - what it means for you

Reserve Bank governor Adrian Orr Photo: NZ Super Fund

The kiwi dollar dropped half a cent on the news to US65.55c

Explaining the decision, Reserve Bank Governor Adrian Orr said the monetary policy committee decided a record low OCR is necessary "to support the outlook for employment and inflation".

"Global economic growth has slowed since mid-2018, easing demand for New Zealand's goods and services. This lower global growth has prompted foreign central banks to ease their monetary policy stances, supporting growth prospects," Orr said.

"However, there is uncertainty about the global economic outlook. Trade concerns remain, while some other indicators suggest trading-partner growth is stabilising."

Orr said growth in New Zealand slowed over the second half of 2018.

"Reduced population growth through lower net immigration, and continuing house price softness in some areas, has tempered the growth in household spending.

Ongoing low business sentiment, tighter profit margins, and competition for resources has restrained investment," he said.

Orr said employment was near its "maximum sustainable level".

"However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly," he said.

Q1: What is the OCR?

So the OCR - or official cash rate - is effectively the wholesale cost of borrowing money. The Reserve Bank sets it on behalf of the Government. They can do that because the Government controls the money supply. Although they have a mandate to do it independently so politicians can't interfere along party lines. It determines the base for bank lending and deposit rates.

Q2: What does it mean for me?

In theory, it sets the rate we pay for our mortgage or the amount of interest we get from our deposit accounts.

Sometimes other factors - like foreign money markets - limit the influence on the retail rate. But broadly if it goes down we pay less for our mortgage. And earn less from our savings.

It also has a big impact on the value of the dollar. Generally, lower rates mean a lower value currency. So the Kiwi should fall if there is a cut today.

Q3: What are the benefits of lowering or increasing the OCR?

Essentially it's about loosening or tightening the money supply depending on the state of the economy - with inflation (and unemployment to a lesser extent) used as a target.

So if the economy is overheating and at capacity with high inflation rates go up and the higher cost of borrowing cools things down.

Right now the opposite is the case. There is very little inflation and growth appears to be slowing so rate cuts are on the table to give the economy a boost.

Q4: Is it bad news for retirees with term deposits?

Yeah. It's not great right now. All the pressure seems to be on central banks to keep rates low in order to support the share markets - especially in the US.

Q5: Why do interests rates seem to have less effect on savings rates than mortgage rates?

That's down to the margins the banks charge. Bank rates sometimes seem a bit like petrol prices - quicker to move one way than the other. Banks might dispute that but its no secret they make a lot of money.

Q6: If there is an OCR cut, will this mean a cut in the Kiwibond rate given it was cut recently?

The rate cut will put downward pressure on Kiwibond rates and all domestic deposit rates - whether they actually move depends on how much the market has already priced in.

Same applies to mortgage rates. Economists are saying that markets have already mostly priced in one rate cut - whether its today or August.