Have you ever heard talk of the official cash rate, or OCR, and wondered what it means?

Or have you ever wondered how that rate affects what you pay for your home loan?

There are a few factors that go into banks setting the rate that borrowers pay, but the OCR is usually an important one.

Here’s what you need to know.

What is the OCR?

The OCR is the official cash rate, which is set by the Reserve Bank’s monetary policy committee. The rate is reviewed every couple of months.

In general terms, when the economy is weak and the Reserve Bank wants to boost growth, it will lower the rate. When the economy is running hot and the bank is worried about the risk of inflation getting beyond its target band of 1 percent to 3 percent, it may increase the rate.

This is because interest rates directly influence how much people and businesses are willing and able to borrow and spend. Lower interest rates generally mean consumers and businesses may feel more comfortable taking on or increasing debt to purchase new assets or expand operations. That increased spending can result in an increase in prices.

However, when interest rates are higher, the reverse generally happens; borrowing becomes more expensive which may discourage consumers and businesses from taking on new debt and may reduce spending in the economy. Less spending helps to keep inflation in control.

Why does it affect home loan rates?

The OCR determines what banks pay for short-term borrowing from the Reserve Bank.

This then flows through to what they will charge their own borrowers. It isn’t the only thing that affects the cost of their funding – they also get short and long-term funding on wholesale markets.

However, it plays a big part in setting the floating rates they offer, and the shorter fixed terms.

On the other side of the coin, it can also affect what banks are able to pay savers for their deposits and fixed-term investments.

So why don’t the rates you’re charged at the bank move every time the OCR does?

You might wonder why, when you see an OCR announcement from the Reserve Bank, it doesn’t immediately change the home loan rates that banks are advertising.

Usually, you’ll see a floating rate response quickly. It’s common to see a flurry of floating rate changes on the afternoon of an OCR move.

However, sometimes the fixed rates don’t move immediately – or even soon after. This can be because the rate change has already been “priced” on the wholesale markets that banks borrow their money from.

Sometimes, for example when markets are expecting an interest rate cut, the banks will have been able to access cheaper funding before the cut happens.

Bank competition can also be another factor in setting rates. When banks are competing for customers, they may be willing to make less of a margin on their lending – reducing their rates.

Need a hand navigating rates?

There are a lot of factors that go into interest rates, both relating to the wider economy and directly to the banks themselves.

As advisers, it’s our job to keep across what’s happening in the market.

We can talk to you about what rates are on offer now and what might be ahead, so that you can make an informed decision about your borrowing requirements.

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.