Cash rate drops: What it means for you?

What happened in July? The Reserve Bank cut the Official Cash Rate from 3.25 to 3 per cent.

Cash rate falls
  • 1 August, 2015
  • Interest rate

What does the OCR do?

The OCR affects the price of borrowing money in New Zealand and traditionally is how the Reserve Bank tries to influence economic activity and inflation.

How does this affect interest rates offered from banks to the public?

The OCR directly affects wholesale borrowing by commercial banks, which in turn flows through to the interest rates which banks offer you when you take out a mortgage or when you invest in a term deposit.

So an OCR cut will mean I pay less on my mortgage?

Typically, yes. Although because banks also borrow offshore, overseas interest rates impact market rates here. A number of New Zealand banks have also cut their floating rates in the wake of this morning's cut.

What does this mean for savers?

This is bad news for savers because while interest rates go down you will also likely get less interest when you put your money into a term deposit. This means investors will look at other ways of making a return, such as the property market or shares.

What does this mean for the New Zealand dollar?

Lower interest rates put downward pressure on the New Zealand dollar. That is because lower returns on investments mean less money from overseas will come into the country and there is less demand for our dollar.

This means petrol prices could go up and a lower dollar means overseas trips are more expensive but makes New Zealand more attractive for foreign tourists because their currency goes further here. That being said, the New Zealand dollar rallied this morning because the language around the Reserve Bank's statement was less pessimistic than the market was expecting.

LJ Hooker NZ

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