Podcast: The Detail

The basics of the OCR

On The Detail today - the basics of the OCR, for everyone who hasn't quite got their head around what it is, and what it does. 

Interest rates are at a record low after the Reserve Bank cut the official cash rate to 1 per cent.

And that’s where most people leave the conversation.

Understanding the OCR takes effort, and this one takes more effort than usual – because it was a drastic cut and everyone’s talking about the prospect of negative interest rates. The big fear for savers – including those trying to rustle up a deposit for a house, and retired people living on the interest from their savings – is that they’ll eventually be paying the bank to mind their money.

That’s not likely, but more on that later.

The Detail asked Newsroom’s Bernard Hickey to explain in simple terms the ramifications of what the Reserve Bank Governor has done with his OCR move, and why.

“The official cash rate is the rate that the Reserve Bank pays the banks for their deposits with the Reserve Bank,” he says. “This is only for the banks … but it’s most important. It’s essentially the baseline for interest rates in New Zealand. And when the Reserve Bank moves it, it’s like moving the slice of cake up and down.”

Banks tend to move their interest rates for borrowers and savers by the same amount of the OCR change. But their rates are not the same as the Reserve Bank’s. “The reason there’s a gap is because the banks need to have a margin to essentially make some money, and also tempt people to give their savings to them,” says Hickey.

Banks now need investors more than ever because: since the Global Financial Crisis, they haven’t been allowed to run off to hot money markets in London and New York.

Last week’s cut was about twice what people expected. So what was Reserve Bank Governor Adrian Orr trying to achieve? The economy isn’t in crisis, unemployment’s low, there’s no recession and we’re doing okay compared to the rest of the world.

Hickey says Orr's basically trying to kick-start the country’s economy, and get people spending.

“The Reserve Bank was saying they want to get ahead of the curve and put in some more juice,” he says.

Some critics say it’s too much too quickly, although Hickey thinks it’s done the right thing.

A negative interest rate is possible, and Hickey bets it will have happened by this time next year. That’s raised the prospect of people removing cash from their banks and stashing it under their mattresses. However, Adrian Orr doesn’t think that will happen.

He thinks competition between banks means they’ll suck up the difference, and you’ll still get a slither of return on your savings. After all, banks rely on the savings deposits of New Zealanders to lend that money out in order to make their profit.

Orr told Hickey that while there is some kind of limit, where people say they’re going back to hard physical cash, there’s also a point at which they say they’re going to go out and look for alternative investments, and create some economic activity. That kind of stimulus is what he’s aiming for.

Interest rates are at critically low levels worldwide – (“We’re all in the same global waka,” says Orr) – and central banks in Europe, Sweden and Japan have been south of zero for some time.

In Europe and Japan sales of safes have gone through the roof as people remove their money and stash it. Hickey points out it’s a great way to encourage crime – that kind of money can be used to trade drugs, hide sex trafficking and launder money. There’s been a suggestion banks stop printing $100 notes, as high denominations are the currency of crooks.

Want more from The Detail? Find past episodes here.

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