CPI, the OCR and interest rates

New Zealand homeowners, businesses and borrowers will be watching two important economic announcements this month, with Statistics New Zealand releasing inflation figures on October 22 and the Reserve Bank announcing its next Official Cash Rate (OCR) decision on October 28. 

Insights with Infinance by Brian Coogan 

But what does inflation have to do with your mortgage or business lending? 

The Consumer Price Index (CPI) measures changes in the prices households pay for goods and services, including food, fuel, housing-related costs and everyday essentials.  

When prices rise faster than expected, inflation can put pressure on household budgets and influence the Reserve Bank’s decisions. 

The Official Cash Rate (OCR) is one of the Reserve Bank’s main tools for managing inflation.  

When inflation is too high, increasing the OCR can put upward pressure on borrowing costs, encouraging households and businesses to spend less.  

Conversely, when inflation eases and the economic outlook allows, reducing the OCR can help bring borrowing costs down and support economic activity. 

However, it is not quite that simple. The Reserve Bank considers more than one inflation figure, including underlying price pressures, employment, economic growth and its outlook for future inflation.  

Financial markets also anticipate potential decisions, meaning mortgage rates can move before an official announcement. 

For borrowers, the implications can vary. Floating mortgage rates are generally more directly influenced by changes in bank funding costs and the OCR, while fixed mortgage rates are also influenced by wholesale interest rates and expectations about where rates are heading. 

The October 22 CPI result will therefore provide an important piece of the puzzle ahead of the Reserve Bank’s OCR decision on October 28. Neither announcement guarantees that mortgage rates will rise or fall immediately. 

At Infinance, we believe understanding your options is just as important as watching the headlines.  

Reviewing your mortgage structure, upcoming refix dates and business finance commitments can help you prepare for changing conditions. 

Thinking about your next move? Talk to Infinance about finance, mortgages and insurance, and make sure your financial arrangements are working for you. 

For more on the above, go to www.infinance.co.nz/insights 

Written by Brian Coogan, Adviser and Director at Infinance – Taupo