The governor of the Reserve Bank, Alan Bollard, increased the official cash rate (OCR) from 2.5% to 2.75%. This is the first rise in three years. During the economic recession, Bollard reduced the OCR from 8.25% in July 2007 to 2.5% in April this year. Now Bollard thinks the economy has improved enough to increase the OCR.

Major banks immediately put up their floating mortgage rate. A floating mortgage changes with the OCR or inflation but a fixed rate stays the same until your mortgage contract finishes which can be five years. Home owners with a floating mortgage will have to pay more now but it is still less than the fixed rate.

Bollard said many things will affect the economy in the near future such as GST, the Emissions Trading Scheme, tax reductions and the economic problems in Europe so there may be more changes to the OCR in the next few months.

Listen to Sept 11th 2008, October 22nd 2008, December 4th 2008, and April 30th 2009 for more information about the OCR.

Questions

Can you think of a reason for the fixed mortgage rate being higher than the floating mortgage rate?

Look at the OCR in July 2007 and compare that with today’s rate. What were some of the higher costs for consumers three years ago?

How does a higher OCR control inflation?

What evidence have you seen that New Zealand is coming out of a recession?