The Official Cash Rate

The Governor of the Reserve Bank, Graeme Wheeler, today dropped the Official Cash Rate (OCR) by 25 points to 2.25%. This was a surprise move although economists expected it to happen later in the year. Mr Wheeler suggested that the OCR could drop again later this year. The Reserve Bank is New Zealand’s central bank which controls money policy in our country. The Governor tries to keep inflation between 1 to 3%. Low oil prices means inflation is quite low at the moment.

There are a number of reasons for the drop in the OCR. Overseas, the slow growth rate in Europe and China means less demand for our exports. In NZ, the high price of houses in Auckland and the drop in dairy prices are a concern. Just two years ago, milk powder was selling for $8.40 a kg but it has been steadily dropping since then. This week Fonterra announced it could only pay $3.90 a kg. This is a huge change. Many dairy farmers owe more than a million dollars to a bank and will now have great difficulty finding enough money to pay back this debt.

On the positive side, there is strong immigration, tourism and construction work. Although Auckland house prices are still too high, the housing market is starting to slow down.

Home owners who have a floating mortgage may be lucky enough to have a drop in their interest rate. However, investors who like high interest rates on their investment money, will receive less money. Meanwhile, the NZ dollar fell 1.5c against the US dollar. This should help our exporters.

For more about the OCR, listen to July 24 2014 and Inflation.

Vocabulary

• economist (stress on 2nd syllable) – a person who has studied economics (stress on 3rd syllable) and is qualified to give advice on the economy (stress on 2nd syllable)
• inflation – prices rising faster than wages
• Fonterra – big dairy company
• debt – money owed; note that ‘b’ is silent
• mortgage – money borrowed from a bank to buy a house; note that ‘t’ is silent
• floating mortgage – interest rates ‘float’; if the OCR goes down, interest payments could go down
• investors – some investors put money in the bank, hoping to increase their money through interest






2 Comments

  1. I’m sorry to hear that New Zealand is in a period of inflation and it’s really a pity to know what farmers in NZ suffer. However, every coin has its two sides. Just as you mentioned, “this should help our exporters” and it is maybe a blessing from a positive point of view. In addition, the high price of houses in China is a common phenomenon due to the number of us Chinese population. But I wonder how did it come about in NZ and what measures the government has taken?

  2. The article mentioned low inflation – the Reserve Bank aims for higher inflation than we have at the moment.
    Listen to October 1st 2015 to hear what the government is doing about it.

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