what is the theoretical economic relationship between inflation and the ocr?if the economic theory behind the relationship of inflation and the ocr occures in real life

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gopikrishna | High School Teacher | (Level 1) Valedictorian

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The Official Cash Rate (OCR) is the interest rate set by the Reserve Bank to meet the inflation target specified in the Policy Targets Agreement. The OCR influences the price of borrowing money in New Zealand and provides the Reserve Bank with a means of influencing the level of economic activity and inflation. An OCR is a fairly conventional tool by international standards.

Most registered banks hold settlement accounts at the Reserve Bank, which are used to settle obligations with each other at the end of the day. Many hundreds of thousands of such transactions are made every day. The Bank pays interest on settlement account balances, and charges interest on overnight borrowing, at rates related to the OCR. These rates are reviewed from time to time, as is the OCR. The most crucial part of the system is the fact that the Reserve Bank sets no limit on the amount of cash it will borrow or lend at rates related to the OCR.As a result, market interest rates are generally held around the Reserve Bank’s OCR level. The practical result, over time, is that when market interest rates increase, people are inclined to spend less on goods and services. This is because their savings get a higher rate of interest and there is an incentive to save; and conversely, people with mortgages and other loans may experience higher interest payments. When people save more or spend less, there is less pressure on prices to rise, and therefore inflation pressures tend to reduce

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