Official Cash Rate (OCR) Interest Rate Reduction
Yesterday the Reserve Bank announced that the Official Cash Rate (OCR) will be cut to 5.25%. The 0.25% reduction is the first decrease the Reserve Bank made in four years.
So, if the Reserve Bank has dropped its interest rate, will that mean our interest rates should also drop?
Yes, we have already seen many banks move to drop their rates slightly – but for a while now the Reserve Bank has kept the OCR at 5.50% and our mortgage and interest rates have been around 6.5 to 8.5%. Why the difference?
The answer is the difference represents bank margins. Banks factor a higher interest rate to us – the borrower and this difference is known as “margin” which covers the banks cost of money, and overheads and contributes to its overall profitability.
When you consider some of the profits banks have reported over recent years, is their “margin” too high? Yes possibly, but they add another factor to the argument and that is their “Risk”, in that some of the money that investors lend banks, could not be paid back – the higher the loan, the greater the risk, so the risk is also built into the margin we pay.
In summary, margin and risk will always mean our interest rate will always be a couple of per cent higher than what the Reserve Bank charges banks.