Really enjoyed this blog, and the 109 comments left under it today…. http://www.stuff.co.nz/business/blogs/lady-in-the-red/3628150/What-is-the-OCR
I really wish we would learn more about this stuff at school, and I don’t mean at university. Kiwi kids should be learning about the OCR, and Interest Rates, and Inflation etc as soon as they can add and subtract.
I reckon there should be a subject that fits right next to Maths and English that covers off ‘HOW TO LIVE SUCCESSFULLY IN NZ” and it should incoporate relevant laws, morgage trends, personal banking, and budgeting, motor car management, personal health management… you know all the things that you just have to do when you ‘grow up’. It seems to me that all these things get taught in such a round about way, and I think we’d all be better off if we learnt it early on…. simple to say, difficult to do I guess.
Anyway, that is not why I am blogging today… today I am blogging because the below is what I thought was a very clear way of explaining the OCR…… It’s a comment from the blog link above….
“olstars #22 11:10 am Apr 28 2010
The main point of the OCR is *not* to give people more or less money, as you alude to (although that is a side effect), but rather to encourage or discourage spending/saving.
The idea is, that if the OCR goes up, this encourages people to save their money (because they get a better interest rate). It also discourages people from borrowing to spend (because it is now more expensive). both of those result in lower spending overall. OCR up = spending down.
Likewise, a drop in the OCR means borrowing to spend becomes cheaper and saving becomes less attractive – so stimulates spending in the economy. OCR down = spending up
A couple of prolems with this arise
1) A large amount of borrowing is long term (mortgages) which means a rise in the OCR translates to higher interest payments on exisitng variable mortgages, which results in people effectively borrowing more, not less as intended. (this is why inflation is sometime quoted as excluding housing spend)
2) NZ banks source a lot of their capital from foreign markets – meaning any change in the NZ OCR can only have a small impact on real interest rates that consumers face”
