Now to Economics and Finance.
Economic experts are back gnawing at that old bone,
the official cash rate.
They say the OCR affects us all,
so we put the question to Brook Grant.
Firstly, to explain, the OCR and its projected movement
is the base rate upon which the bank calculates
the one year interest rate, two year interest rate etc,
in order to create an interest rate framework/graph.
On top of this they add a margin,
currently around two to three percent,
and we get the bank home loan rates.
Adding a margin is common practise for businesses,
to pay for operating costs as well as being able to turn over a profit.
Banks are a business - they buy and sell money.
I will try to quote this correctly,
RBNZ decreased the OCR last month by .25%,
however that cut was not passed onto households - Why?
The OCR is only one driver of bank costs.
They've come out and said that although the OCR was decreased,
their cost of offshore funding has increased,
so they have decided that for now,
the majority of the benefit of the OCR decrease
will be retained by them (and not passed on to consumers)
to support their business.
And so, what about inflation?
How does the reserve bank monitor it?
First I'll explain what inflation is;
You go to the store to buy a bottle of milk, it costs $3.
The next week you go back it costs $3.50.
That 50c is the inflation.
The Reserve Bank has a kete with a collection of goods,
considered a gauge of standard living costs.
So there might be food in this kete,
medicine, a bus ticket and an electricity bill.
The Reserve Bank monitors
the cost of this collection of goods over time,
to help determine how healthy the economy is.
If inflation is decreased, what are the potential problems?
That is a good question because one would generally think
that if the price of something falls,
then that's a good thing.
But it is problematic if the price keeps falling,
and people start to think the price will continue to fall
for the foreseeable future.
We start to change our buying behaviour – we defer our purchases.
For example,
if I see a new TV I want to buy, I won't rush to buy it
because I know it won't be long
before a newer model is released.
It will then be the 'it' TV, and the one I wanted will
get demoted to the second shelf so to speak,
and its price will fall.
At that stage I will purchase it!
Now that's great for me, but not so much for the business -
they begin to experience reduced profits
and they thus become reluctant to expand operations
and to take on new employees
and that starts to have a ripple effect on the wider economy.
So lowering the OCR will increase inflation?
The thinking is that if the OCR is reduced,
then our home loans repayments fall.
We therefore have more money to buy things,
and so inflation goes up,
and all is well with the economy.
On paper, it's a good idea.
But if we go back to the example I mentioned earlier,
in regard to the banks, in reality, it's not so simple.
That's the reason why, eight years on from the GFC,
economies are still struggling and inflation is still low.
Brook Grant, thank you.