Download OFFICIAL CASH RATE HOW DOES IT WORK?

MONETARY POLICY
•
“Monetary Policy is defined as the
setting of interest rates, in order to
control the quantity of credit and
money supply, to influence the level
of economic activity”
• There are 3 tools available under
this policy:
1. Official Cash Rate
2. Open Market Operations
NOT USED MUCH THESE DAYS
3. Jawboning
7.25%
6.75%
RESERVE BANK
-200
+200
BNZ
OCR
7%
Fa’aoge’s
Account
WESTPAC
Anna’s
Account
-200
+200
BNZ Cheque
Pay Anna $200
OFFICIAL CASH RATE
HOW DOES IT WORK?
• The Official Cash Rate (OCR) is an interest
rate set by the Reserve Bank to implement
monetary policy, so as to maintain price
stability.
• The OCR review is done 8 times in a year.
• 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 etc.
• In turn, this influences the overall level of
economic activity in the country and therefore
inflation.
• When an OCR is announced - it is a
percentage number – 7.25%
• This means 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 ie 7.00%
• The Reserve Bank also undertakes to
Lend overnight cash to banks against
good security, charging interest at
0.25 per cent above the OCR – ie
7.50%
• 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. Why?
• Because other banks would undercut that,
using credit from the Reserve Bank.
• Similarly a bank is not likely to lend shortterm at below the OCR because the same
bank can lend to the Reserve Bank and
receive interest at the 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.
OPEN MARKET OPERATIONS
• Reserve Bank participates in the financial
market on a daily basis.
• It does this to maintain the right amount of
cash that is available to all the banks to
settle each others debts.
• It does this by injecting money into the
money market or by soaking it up.
• This is done through buying existing
securities from the banks – (injecting) or
selling securities to them – (soaking up).
JAWBONING
• The method used by the Governor
of RBNZ by talking to the Business
sector.
• This involves dropping hints about
future OCR movements.
• It also involves sending messages to
consumers about their spending
and saving patterns.
• These statements may or may not
be backed up with actions.