OCR vs Swap Rates
When interest rates are discussed in New Zealand, two terms are often mentioned interchangeably: the Official Cash Rate (OCR) and swap rates. While they are closely related, they serve very different roles in the financial system. Understanding the distinction is particularly important for borrowers, as each affects interest rates in different ways.
What Is the OCR?
The Official Cash Rate (OCR) is set by the Reserve Bank of New Zealand (RBNZ) and is the primary tool used to control inflation and influence economic activity.
The OCR represents the interest rate at which banks can borrow or lend overnight funds. By raising or lowering the OCR, the RBNZ influences short-term interest rates across the economy.
In practice:
An increase in the OCR is designed to slow spending and reduce inflation.
A decrease in the OCR is intended to stimulate borrowing and economic activity.
The OCR has the strongest influence on short-term and floating interest rates, including floating home loans, overdrafts, and savings rates. Changes to the OCR are often reflected relatively quickly in these products.
What Are Swap Rates?
Swap rates are market-determined wholesale interest rates, not set by the Reserve Bank. They are derived from interest rate swap agreements, where one party exchanges a floating interest rate for a fixed rate over a specific period (such as one, two, or five years).
Swap rates reflect:
Expectations of future OCR movements
Inflation expectations
Global interest rate conditions
Supply and demand in financial markets
Because banks use swap markets to hedge their lending risk, swap rates are a key driver of fixed mortgage rates.
When swap rates rise, fixed mortgage rates typically increase. When swap rates fall, fixed mortgage rates often decline — sometimes even when the OCR remains unchanged.
How OCR and Swap Rates Are Connected
Although the OCR and swap rates are different, they are linked through expectations.
The OCR anchors the short-term interest rate environment. Financial markets then form expectations about where the OCR will be over the coming years. These expectations are priced into swap rates.
As a result:
Swap rates can move ahead of OCR changes.
Fixed mortgage rates may rise or fall before the Reserve Bank takes action.
Banks price fixed rates based on where markets believe interest rates are heading, not just where they are today.
This is why borrowers sometimes see fixed rates change even when the OCR has not.
Why This Matters for Borrowers
The distinction between OCR and swap rates explains why different types of mortgage rates behave differently.
Floating-rate borrowers
More directly influenced by the OCR
Typically see changes after Reserve Bank announcements
Fixed-rate borrowers
More influenced by swap rates
Rates are driven by market expectations of future interest rates over the fixed term
If markets expect interest rates to fall in the future, swap rates may decline and fixed mortgage rates may ease — even if the OCR remains high in the short term.
