How the Reserve Bank Set the Official cash rate:
The Reserve Bank of New Zealand (RBNZ) employs a detailed monetary policy decision-making process to determine the Official Cash Rate (OCR). Each year, seven decisions are made, four of which are accompanied by a comprehensive Monetary Policy Statement (MPS). These decisions aim to fulfil the objectives outlined in the Policy Targets Agreement (PTA) while addressing uncertainties related to economic data, structural changes in the economy, and future projections.
The process involves four key steps: gathering and analysing information, making decisions, communicating outcomes, and conducting reviews. Collaboration is a cornerstone of this approach, engaging teams from the Economics and Financial Markets Departments as well as the Governing Committee and the Monetary Policy Committee (MPC). These groups work together to analyse data, produce forecasts, and evaluate policy options, with the Governor retaining final statutory authority.
The RBNZ utilizes tools like NZSIM, a structural forecasting model, alongside professional judgment and external input, to refine its economic projections. Iterative discussions ensure all variables and scenarios are thoroughly considered. Decisions are communicated to stakeholders and the public through the MPS, which details the economic outlook, key judgments, and potential risks. A simplified process is followed for interim OCR reviews.
Continuous review and accountability are integral to RBNZ’s process. The Bank uses internal and external evaluations, as well as stakeholder feedback, to enhance its decision-making framework. Its emphasis on transparency and adaptability ensures effective responses to economic developments and challenges.
November 27th – the date of the last OCR adjustment for 2024. Economists are predicting a cut of 0.5% which will bring the OCR down to 4.25%. If this eventuates then they predict increased competition between the banks which could benefit the borrowers in the form of lower mortgage rates. They suggest 5.39% for a one-year fixed mortgage – the most popular choice currently. More enticingly the 3-year rate may fall below 5% presenting an attractive long-term option for borrowers. The Reserve Bank has been working to bring annual inflation back within its target of 1-3% and these efforts look to have been successful. However, the broader economy still faces challenges from a cooling job market and a tightening of household budgets. The anticipated rate cut is expected to stimulate economic activity and ease financial pressures on households and businesses.
Incidentally international economic researchers Capital Economics predict that the OCR rate will fall to 2.25% during 2025.