Swap rates, OCR, and what actually moves your mortgage.

The OCR, briefly

The Official Cash Rate is the rate the Reserve Bank of New Zealand sets for overnight lending between RBNZ and commercial banks. It is the foundational interest rate in the economy. When RBNZ moves the OCR up, the cost of overnight funding for banks rises, and banks pass that on through their lending rates. When RBNZ cuts, the same in reverse. The OCR moves seven times per calendar year on a pre-announced schedule (RBNZ Monetary Policy).

Critically, the OCR affects floating rates almost immediately. Most banks reprice their floating rates within 24 to 48 hours of an OCR move. Fixed rates are different.

Swap rates, in plain English

When a bank lends you money on a 2-year fixed rate, it commits to charging you a specific rate for 24 months. The bank itself doesn't have 24 months of guaranteed funding at a known cost; it borrows short-term in wholesale markets and lends long-term to you. The mismatch is hedged in the swap market, where banks swap floating-rate funding for fixed-rate funding with other counterparties.

The price of that swap, for a given term (1, 2, 3, 5 years), is the swap rate. It is a market price, set by supply and demand between banks, hedge funds and institutional investors. It moves every minute markets are open, and it reflects the market's collective view of where short-term rates will be over the swap's life.

For a 2-year fixed mortgage rate, the bank takes the 2-year swap rate and adds a margin of roughly 1.5% to 2.5%, depending on competition and the bank's funding cost structure. That margin covers operating costs, capital, profit, and the credit risk that you might not repay.

Why your rate doesn't move when the OCR moves

If the OCR moves by 25bp at the next RBNZ decision, the 2-year swap rate may move by 5bp, 15bp, or sometimes in the opposite direction. The reason is that the OCR move was largely anticipated by the swap market in the weeks before. Markets price in expected moves continuously. By the time the decision is announced, most of the move is already in the swap rate, so the actual decision moves the swap rate only marginally (the surprise component, if any).

This is why you sometimes see banks dropping their 2-year fixed rates before an OCR cut. They are responding to the swap-rate move that has already happened in anticipation. It also explains why an OCR cut occasionally doesn't move fixed rates at all: the market priced the cut and bank rates moved last month.

The forward swap curve (the set of swap rates at 1, 2, 3, 5 years) is the best public proxy for where the market thinks the OCR is going. A downward-sloping curve says the market expects cuts. A flat curve says the market expects rates to stay where they are. An upward-sloping curve says hikes are expected. (These curves are published daily; interest.co.nz tracks them.)

What this means for your decisions

1. Don't wait for the next OCR to "see what happens".

If swap rates have already moved, the bank rates have moved with them. Waiting for RBNZ to confirm the move doesn't give you a better rate; you get the same rate the bank was already offering. If anything, waiting introduces the risk that swap rates move back up before you fix.

2. Floating rates are the OCR's most direct relative.

Floating rates are typically the OCR plus around 3%, and they move with the OCR within a couple of business days. If you're on float and RBNZ cuts 25bp, you can expect your floating rate to drop by 20 to 25bp inside a week.

3. Fixed rates are the swap market's relative.

If you want to predict where 2-year fixed rates are going, watch the 2-year swap rate, not the OCR commentary. The 2-year swap rate today is the bank's funding cost; their 2-year fixed mortgage rate is that plus a margin. The margin doesn't move much. The swap rate moves daily.

The OCR decision lifecycle, in OCR Watch terms

For every OCR decision, here's the cycle we watch:

1. Three weeks before: RBNZ speeches and commentary signal the likely direction. Swap rates start to move with the consensus view.
2. One week before: Market positioning is mostly set. Bank rates may already reflect the expected decision.
3. Day of decision (2pm NZST on a Wednesday): RBNZ announces. Swap rates move on the surprise component, not the consensus.
4. Within 24 hours: Banks reprice floating rates.
5. Within 2 hours: We publish what it actually means for households with refixes landing in the next 6 months.

The two-hour window is short on purpose. Bank rate sheets land in our inbox the same afternoon. The OCR decision and the bank rate moves can be reconciled into a single piece of practical commentary by 4pm. That's where the OCR Watch sits.

What we tell clients

"Watch swap rates, not the OCR" is the headline, but it's not actionable for most households. The practical answer is: when you have a refix landing, don't try to time the OCR. Look at the rate curve banks are offering you today, look at the expected curve in the next 6 months (which the swap curve will tell you), pick the structure that fits your buffer and tolerance, and execute. If swap rates move 40bp in the meantime, you reset on the next refix anyway. Trying to play the rate on a single fix is a mug's game even for professionals.