Interest rate 101

What’s a central bank?

This is a country's primary monetary authority and it decides on the interest rate. Ours is called the Reserve Bank of New Zealand, known as the RBNZ. Other examples include the European Central Bank, the Bank of England and the Federal Reserve in the US. The RBNZ is independent of politics, so it can’t be dictated to by the PM or anyone else. So we usually get what’s best for the economy; not short-term political objectives, like lowering rates during an election campaign.

Who makes the decisions?

The RBNZ’s people are very smart and they get out a lot. Eight times a year they pass judgement on the latest inflation figures, economic growth, the employment rate etc. They also look at what’s going on overseas and how that might affect us.

This is in your interest

The RBNZ uses interest rates to control economic activity. It raises them to keep the inflation genie square in its bottle and drops them to stimulate demand and investment. The principle is that if rates are higher, less people will want to borrow money and economic activity will slow and so will prices and that means inflation slows. And vice versa.

Class dismissed!