The Reserve Bank of New Zealand (RBNZ) plays a critical role in setting the country’s official cash rate (OCR), which directly influences borrowing costs across the economy. When the RBNZ lowers this rate, the goal is usually to stimulate economic activity by making borrowing cheaper and encouraging spending. But does a lower OCR automatically lead to lower credit card interest rates? The answer is more complicated than it might seem.
Understanding the Link Between the OCR and Lending Rates
The OCR sets the benchmark for short-term interest rates in New Zealand. Banks and lenders use it to determine how much they pay to borrow money, which in turn affects the rates they charge consumers for various products such as home loans, personal loans, and savings accounts. When the OCR goes down, banks often reduce interest rates on mortgages and term deposits fairly quickly.
However, credit card interest rates operate a little differently.
Why Credit Card Rates May Not Fall
Credit card interest rates tend to be sticky—that is, they don’t move much in response to changes in the OCR. There are several reasons for this:
- Risk Premium: Credit card debt is unsecured, which makes it riskier for lenders. To offset this risk, credit card interest rates are set much higher than mortgage or car loan rates and are less responsive to changes in wholesale funding costs.
- Operational Costs and Default Rates: Managing credit card portfolios involves higher costs and default risks. Banks factor this into the interest rates they charge and are less inclined to pass on OCR reductions to credit card customers.
- Profit Margins: Credit cards are often a lucrative product for banks. Lowering the interest rate would cut into those margins, and without competitive pressure or regulatory requirements, banks may see little reason to reduce rates.
- Fixed Pricing Model: Unlike floating mortgage rates, credit card rates are typically set as fixed interest rates. They don’t automatically adjust in line with changes to the OCR.
Historical Trends
Historically, even when the RBNZ has made significant cuts to the OCR—as seen during the COVID-19 pandemic—credit card interest rates have remained largely unchanged. This reflects the sector’s structural pricing rather than dynamic, market-sensitive pricing.
What Consumers Can Do
While a lower OCR might not directly impact credit card rates, it could still benefit consumers in other ways. For example, balance transfer offers or low interest credit card may become more attractive as banks compete for business in a low-rate environment.
If you’re carrying high-interest credit card debt, consider:
- Consolidating your debt into a lower-interest personal loan.
- Using a balance transfer to shift your debt to a 0% interest credit card (for a limited time).
- Negotiating with your bank—some may offer a temporary reduction in interest if you’re facing financial hardship.
Final Thoughts
In summary, while a decrease in the RBNZ interest rate may lead to lower costs for certain types of borrowing, it’s unlikely to result in a significant drop in credit card interest rates. Consumers looking to reduce their credit card interest burden should explore alternative strategies or switch to a credit card with lower interest rate, as waiting for banks to cut those rates may be a long game with little payoff.