ķ'The Official Cash Rate (OCR) is an interest rate set by the Reserve Bank of New Zealand to implement monetary policy, so as to maintain price stability. // Introduction The Reserve Bank of New Zealand is the central bank of New Zealand. ...

By setting the OCR, the Reserve Bank is able to substantially influence short-term interest rates, such as the 90-day bill rate, floating mortgages and the like. In turn, this influences the overall level of economic activity in the country and therefore inflation. Note however that this sequence takes time and the pace of adjustment varies depending on the economic context.

The OCR influences short-term interest rates in the following way. When an OCR is announced - it is a percentage number - the Reserve Bank undertakes to pay financial institutions an interest rate 0.25 per cent below the OCR for money deposited in Reserve Bank settlement accounts. The Reserve Bank also undertakes to provide overnight cash to banks against good security, charging interest at 0.25 per cent above the OCR. Most importantly, the Reserve Bank sets no limit on the amount of cash that it will take in or let out, at 0.25 per cent above or below the OCR.

The effect of this is that no commercial bank is likely to offer short-term loans at a rate significantly higher than the Official Cash Rate. That's because other banks would undercut that, using credit from the Reserve Bank. Similarly a bank is not likely to lend short-term at below the OCR because the same bank can lend to the Reserve Bank and receive interest at the OCR level.

The key point is that the Reserve Bank is able to lend or borrow overnight money in whatever volumes are needed to hold the market interest rate at the Bank's OCR level. By controlling short-term interest rates in this way, the Reserve Bank can influence short-term demand in the economy, and by that put pressure upwards or downwards on average prices.

The Reserve Bank reviews the OCR eight times a year. The Reserve Bank does this at the release of their quarterly Monetary Policy Statements and approximately halfway between each Monetary Policy Statement. Only in exceptional circumstances would the Reserve Bank make unscheduled adjustments to the OCR. They did this shortly after the 11 September terrorist attacks, for example.

The OCR was introduced as a device to implement monetary policy in March 1999. Compared to earlier systems used by the Reserve Bank, it is simpler and more easily understood. Previously the Bank's primary device by which it conducted monetary policy was via control over the quantity of cash made available to settlement banks, as opposed to its price (i.e. interest rates).