The Official Cash Rate, introduced in March 1999, is the interest rate set by the Reserve Bank to meet its inflation target, (currently 1 to 3 percent on average over the medium term), with a focus on keeping future average inflation near the 2 percent target mid-point.
The OCR is reviewed eight times a year by the central bank. Monetary Policy Statements are issued with the OCR on four of those occasions but unscheduled adjustments to the OCR may occur at other times in response to unexpected or sudden developments, but to date this has occurred only once, following the 9/11 attacks in 2001.
What does the OCR do?
The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a way of influencing the level of economic activity and inflation.
By international standards, an OCR is a fairly conventional tool and in the past, the Reserve Bank used a variety of tools to influence inflation, including influencing the supply of money and signalling desired monetary conditions to the financial markets. These mechanisms were more indirect and difficult to understand.
How does the OCR work?
Reserve Bank settlement accounts, held by most registered banks, are used to settle obligations with each other at the end of the day.
For example, money from the many hundreds of thousands of Eftpos and cheque transactions made every day is paid by your bank to the bank of the recipient.
The bank pays interest on settlement account balances, and charges interest on overnight borrowing, at rates related to the OCR. These rates are reviewed from time to time, as is the OCR. The most important part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR.
Visit the Reserve Bank website for more detail.