Interest rates can make a big difference to a household’s finances.

When interest rates are rising, it can mean higher payments for people with home loans, if they’re refixing their mortgages or on a floating rate. Rising rates can be good news for people with money in the bank, however.

When rates are falling, home loan borrowers may experience some relief, but savers may see their returns fall.

So what drives interest rates, and how are decisions made about where they go?

What’s the official cash rate, anyway?

One of the drivers of retail rates is the official cash rate (OCR). This is a particular influence on floating home loan rates and shorter-term fixed rates.

The Reserve Bank sets the OCR and uses it as its main tool to manage inflation and support economic stability.

When there are signs that inflation is picking up, the Reserve Bank often increases the OCR. This means that it costs households and businesses more to borrow, which reduces their ability to spend more elsewhere. It encourages saving rather than spending.

When the economy needs a boost, the Reserve Bank can reduce the OCR. This tends to reduce the cost of borrowing, which encourages households and businesses to invest and spend, which in turn stimulates the economy.

How do we know where rates may go?

The Reserve Bank has a number of factors to weigh up when it’s deciding on an appropriate strategy for the OCR.

When they’re making predictions, economists look at some key data points.

Inflation: The Reserve Bank wants inflation to be near the middle of its target range of 1 percent to 3 percent, over the medium term. If there are signs that the consumer price index is moving beyond that in a sustained way, it may mean interest rates could rise.

Employment: Low unemployment and a tight labour market can put pressure on inflation, because a shortage of workers may mean that businesses have to pay more to attract and keep staff. Sometimes, this means businesses must put up prices to cover their costs, and higher wages may mean people have the capacity to pay higher prices for goods and services – potentially adding to inflation.

Spending: Strong spending may also indicate there is more demand in the economy, which can be inflationary.

Global conditions: While New Zealand sets its own monetary policy, it can be affected by what is happening offshore. International pressures can weigh on the economy and divergence in interest rates can also affect the NZ dollar.

A complex picture

While we know the factors that go into making interest rate decisions, there are a lot of nuances involved.

Depending on the circumstances, the Reserve Bank may put more weight on some factors than others. For example, in April 2026, the New Zealand economy was not strong and the labour market was relatively weak, but there was still commentary about the need for interest rates to rise sooner than previously expected, because war in the Middle East was pushing up fuel prices and had the potential to cause wider inflation.

It can be hard to decide on an appropriate interest rate strategy. There’s usually no “correct” solution, and you’ll need to find an approach that works for you. If you’d like to chat about where interest rates might go, or how you’d cope with any potential movements, get in touch with the expert SHARE team. We’re here to help.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.