The link between OCR changes and bank lending rates

A number of people have been getting confused about the link between changes in the Official Cash Rate (OCR) initiated by the Reserve Bank and what happens with bank lending rates.  

Thursday, April 1st 2010, 12:23PM

In the BNZ Weekly Overview Tony Alexander clears this confusion with a detailed explanation of the relationship between the OCR and bank lending rates.

But in the end, he says, "what borrowers need to realise is that none of that matters a hoot when it comes to bank lending rates.

"That is because the OCR is only the tool which the Reserve Bank uses to influence its target which is the lending rates banks charge."

He says the Reserve Bank has in its mind a level of lending rates it considers optimal for influencing growth and the economy and it moves the OCR to try and get the rates it wants.

"If they raise the cash rate and we banks decide to sacrifice profits by not raising our lending rates, then the Reserve Bank will simply keep raising the OCR until we do - otherwise what is the point in raising the OCR?"

Alexander tells borrowers not to waste their time sitting back and trying to figure out how their offshore risk premiums may change and therefore how much forecast OCR changes may influence their borrowing costs, because the Reserve Bank is going to alter the OCR to take into account any change in these raw material costs which banks face.

In borrowing advice he says he would still be floating.

"The recent round of cuts in fixed interest rates might suit those seeking high rate security, but I would still look to delay jumping into a one or two year rate until closer to the time when the Reserve Bank starts raising the cash rate.

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