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Bursary Economics Cloze Exercise

What is the Official Cash Rate?

 Reserve Bank fact sheet no. 4

Read the following information sheet provided by the Reserve Bank of New Zealand. Using the words provided in the box at the bottom of the page, fill in the spaces to correctly complete the article.

The Official Cash Rate (OCR) is an _____________ set by the Reserve Bank to implement _______________, so as to maintain price stability.

By setting the OCR, the Reserve Bank is able to substantially influence short-term interest rates, such as the ________________, floating mortgages and the like. Short-term interest rates have a big impact on the overall level of economic activity in the country and therefore on _____________.

The OCR influences short-term interest rates in the following way. When an OCR is announced - it is a  _____________________- the Reserve Bank undertakes to pay financial institutions an interest rate ___________________the OCR for money deposited in Reserve Bank _____________________. The Reserve Bank also undertakes to provide ___________________ to banks, for which the Reserve Bank charges interest at __________________ the OCR. Most importantly, the Reserve Bank sets no limit on the amount of cash that it will take in or let out, at 0.25 per cent above or below the OCR.

The effect of this is that no commercial bank is likely to offer short-term loans at a rate _________________ than the Official Cash Rate. That's because other banks would ____________ that, using credit from the Reserve Bank. Similarly a bank is not likely to lend short-term at below the OCR because it can __________ to the Reserve Bank at the OCR level.

The key point is that the Reserve Bank is able to lend or borrow _______________________ in whatever volumes are needed to hold the interest rate at its OCR level.

The Reserve Bank reviews the OCR eight times a year. We do this at the release of our quarterly Monetary Policy Statement and approximately halfway between each Monetary Policy Statement. Only in exceptional circumstances would the Reserve Bank make unscheduled adjustments to the OCR.

The OCR was introduced as a device to implement monetary policy in March 1999. Compared to earlier systems it is simpler and more easily understood. Previously the Reserve Bank's primary device by which it conducted monetary policy was via control over the ______________________ made available to settlement banks, as opposed to its price (i.e. interest rate).

 

interest rate	0.25 percent below	lend	quantity of cash
overnight cash	significantly higher	undercut	monetary policy
overnight money	90-day bill rate	inflation	0.25 percent above
settlement accounts	percentage number

What is the Official Cash Rate?

Cloze Exercise Answer Sheet

Reserve Bank fact sheet no. 4

The Official Cash Rate (OCR) is an interest rate set by the Reserve Bank to implement monetary policy, so as to maintain price stability.

By setting the OCR, the Reserve Bank is able to substantially influence short-term interest rates, such as the 90-day bill rate, floating mortgages and the like. Short-term interest rates have a big impact on the overall level of economic activity in the country and therefore on inflation.

The OCR influences short-term interest rates in the following way. When an OCR is announced - it is a percentage number - the Reserve Bank undertakes to pay financial institutions an interest rate 0.25 per cent below the OCR for money deposited in Reserve Bank settlement accounts. The Reserve Bank also undertakes to provide overnight cash to banks, for which the Reserve Bank charges interest at 0.25 per cent above the OCR. Most importantly, the Reserve Bank sets no limit on the amount of cash that it will take in or let out, at 0.25 per cent above or below the OCR.

The effect of this is that no commercial bank is likely to offer short-term loans at a rate significantly higher than the Official Cash Rate. That's because other banks would undercut that, using credit from the Reserve Bank. Similarly a bank is not likely to lend short-term at below the OCR because it can lend to the Reserve Bank at the OCR level.

The key point is that the Reserve Bank is able to lend or borrow overnight money in whatever volumes are needed to hold the interest rate at its OCR level.

The Reserve Bank reviews the OCR eight times a year. We do this at the release of our quarterly Monetary Policy Statement and approximately halfway between each Monetary Policy Statement. Only in exceptional circumstances would the Reserve Bank make unscheduled adjustments to the OCR.

The OCR was introduced as a device to implement monetary policy in March 1999. Compared to earlier systems it is simpler and more easily understood. Previously the Reserve Bank's primary device by which it conducted monetary policy was via control over the quantity of cash made available to settlement banks, as opposed to its price (i.e. interest rate).