Blog Article

When the Reserve Bank of New Zealand (RBNZ) announces a change to the Official Cash Rate (OCR), it’s often followed by speculation about how Banks will adjust their interest rates. While the OCR is a critical factor, it’s not the sole determinant of mortgage rates. Let’s explore how Banks set their interest rates after an OCR change.

The Role of the OCR in Interest Rates

The OCR is essentially the rate at which banks can borrow money or deposit surplus funds with the Reserve Bank. When the OCR rises, borrowing costs for banks increase, and when it falls, borrowing becomes cheaper. These changes influence the broader economy, affecting consumer lending and mortgage rates.

What Happens After an OCR Change?

1. Immediate Review of Costs
   Following an OCR announcement, Banks review how the change impacts their overall funding costs.
   • Variable (Floating) Rates: These rates are most directly influenced by the OCR. If the OCR rises or falls, variable rates often follow suit relatively quickly. This we have seen recently with announcements made by Banks on the day being to their floating rates.
   • Fixed Rates: Fixed mortgage rates depend more on long-term wholesale funding markets rather than the OCR alone. However, expectations of future OCR movements can impact these rates.
2. Funding Sources and Costs
   Banks rely on various sources of funding to offer loans:
   • Domestic Deposits: Banks may increase deposit rates to attract more savers, particularly when the OCR rises.
   • Wholesale Funding: Many banks also borrow money from international markets, where interest rates depend on global economic conditions, not just the OCR.
   If global funding costs rise, banks may need to increase mortgage rates even if the OCR stays steady.
3. Competition Among Banks
   The competitive environment plays a significant role in how banks adjust their rates. Even after an OCR increase, some banks may delay raising their rates to attract customers or maintain market share. Similarly, in a falling OCR environment, banks might lower rates faster to stay competitive.
4. Economic Conditions
   Banks also consider the broader economic landscape, including:
   • Inflation: High inflation may lead banks to maintain higher interest rates to align with the Reserve Bank’s objectives.
   • Unemployment: In weaker economic conditions, Banks may be cautious about raising rates too much to avoid discouraging borrowing.
   • Global Markets: Economic conditions overseas can impact funding costs and influence how banks set rates.

Fixed vs. Variable Rates: The Differences

• Variable Rates: These adjust more directly and quickly after an OCR change. Borrowers with floating loans often see rate changes reflected in their repayments within weeks of an OCR announcement.
• Fixed Rates: These are influenced by long-term bond yields and funding markets, which factor in expectations of future OCR movements rather than immediate changes.

Why Don’t All Banks Adjust Rates the Same Way?

You may notice that not all banks adjust their interest rates equally or at the same time. This happens because each Bank has its own:

• Funding Mix: The balance of domestic deposits versus wholesale funding.
• Business Strategy: Some Banks may prioritise market share over profitability in the short term.
• Risk Appetite: Banks assess their risk exposure and adjust pricing accordingly.

What Does This Mean for Borrowers?

Understanding how Banks set rates can help borrowers make better decisions:

• Timing: If you’re on a floating rate, monitor OCR announcements to anticipate changes in your repayments.
• Fixed Rates: If the OCR is expected to rise, locking in a fixed rate early could save money.
• Negotiation: Banks often have flexibility, so it pays to work with our mortgage advisers to secure the best deal.

How a Mortgage Adviser Can Help

Navigating the complexities of interest rate changes can be overwhelming. A Mortgage Adviser can:

• Explain Your Options: Whether to choose a fixed or variable rate, and when to lock in a rate as timing can be crucial.
• Negotiate with Lenders: Leverage their expertise to secure competitive rates having full awareness as to how different lenders have reacted and what they are pricing.
• Provide Long-Term Advice: Help you structure your loan to minimize costs over time.

Conclusion

Banks in New Zealand use a combination of factors to set interest rates after an OCR change. While the OCR is a key driver, other considerations like funding costs, competition, and economic conditions also come into play.

If you’re unsure how OCR changes might impact your mortgage or want to explore your options, get in touch with us today. We’ll help you find the best solution tailored to your financial goals.