The official cash rate (OCR) dropping to 2.5% is heralded as being great for homeowners and investors. Lower interest rates make it more affordable to finance purchasing a home or a property investment. On the flip side capital growth is likely to be slower as a low OCR is indicative of an economy that is sluggish, with little inflation.

The Reserve Bank reviews the OCR every six weeks. Since being introduced in March 1999, there have been 88 reviews resulting in no change to the OCR, 20 reviews resulting in drops to the OCR and 28 resulting in increases. 75% of the reviews where there has been a change it has been 25 basis points or 0.25%, one way or the other. There have been three instances where the OCR has been increased by 50 basis points in one review and twice it has been reduced by 150 basis points at one review. The highest the OCR has climbed to was 8.25% between July 2007 and June 2008. From July 2008 to April 2009 the OCR dropped by 5.75%.

The longest period of no change was from March 2011 to January 2014 when it sat on 2.5% through 24 reviews. After that it climbed as far as 3.5% in July 2014, staying there until it started dropping again in June 2015. Changes to the OCR have an immediate impact on floating interest rates but less impact on short and long-term borrowing.

At October 2015, 42% by number of residential loans were on floating rates but that represented only 25% of the value of loans as the below table shows. 85% of fixed-term loans were fixed for short periods of no more than two years. Why are banks the winners? Up until 2007 the margin between floating interest rates and the OCR was relatively stable at around 2%. Since then the OCR has come down almost 6% but floating rates have not dropped by the same amount, in fact the margin between bank floating rates and the OCR has been between 3% and 3.5%. An extra 1.5% on $53 billion of floating loans is quite a nice premium, especially in a ‘sluggish’ economic environment.