New Zealand has never been a cheap place to run a small business – and now the Reserve Bank is asking SMEs to absorb higher prices, just as Middle East tensions threaten to push up inflation and input costs even further.
The frank assessments from RBNZ Governor Dr Anna Breman and Chief Economist Paul Conway come as annual inflation sits at 3.1 per cent already above the Reserve Bank’s target band. With fuel, fertiliser and broader costs increasing, employers face a budget squeeze made worse by weak consumer demand.
Governor Breman acknowledged the bind facing business owners directly, at a time when New Zealand’s economic recovery was still in its early stages. “Household and business balance sheets are also more fragile, with less scope to absorb significant price increases. This means it may be harder for businesses to increase prices,” she said.
Why NZ Is Feeling The Effects Of The Conflict
The Governor’s warning centred on a specific geographic choke point that dictates the price of doing business in New Zealand: the Strait of Hormuz. “Roughly 20 per cent of globally traded oil, 20 per cent of globally traded liquified natural gas and one-third of the global supply of fertiliser flows through this Strait,” she detailed.
For New Zealand’s agricultural and transport-dependent SMEs, this is a direct hit to the bottom line. A disruption to the global supply of fertiliser doesn’t just raise prices – it threatens the physical availability of chemicals required for the next growing season.
Furthermore, the Governor warned the banking system may feel ripple effects, through tighter credit markets. “There is a risk that global financial stability risks could emerge and affect the cost and availability of funding for New Zealand banks,” she said. In lay terms, small businesses could see their borrowing costs rise if New Zealand banks have to pay more to secure money from overseas, regardless of what happens to the Official Cash Rate locally.
Rising Costs Hit an Economy With Little Room to Absorb Them
While the Middle East conflict creates an immediate supply shock, Conway argued in a separate address that the challenge for New Zealand was deeper than a temporary spike. He noted that even as inflation slows, lower prices are gone for good.
“While we are seeing the rate of inflation finally move back toward our target midpoint, we must be clear-eyed about the ‘price level’ itself,” he stated. “The cost of goods and services in New Zealand has undergone a structural step-change; on average, the prices businesses pay for inputs and consumers pay for essentials are 26 per cent higher than they were in 2019.” He offered a blunt conclusion for business owners: “We are not returning to the price tags of the previous decade.”
This “structural step-change” is hitting an economy that carries little spare capacity, with a weak labour market and cautious consumers. While official data shows that wages have grown by 32 per cent since the pandemic – outpacing the 26 per cent rise in general prices – most New Zealanders report feeling significantly poorer. This is because the costs that have risen the fastest, housing and insurance, are non-discretionary. For a local cafe or retailer, even if their customers are technically earning more, that extra cash is being swallowed by the bank and the insurance company before it ever reaches the local shopping centre. SMEs will be hoping some of the $50 a week the New Zealand government is giving lower-income families may flow through to them.
RBNZ Wants Kiwi Businesses To Take One For The Team
The RBNZ’s most pointed message for employers centres on “second-round effects”—the risk that rising living costs could trigger wage demands that embed inflation. The Governor made a direct appeal to the business community to shoulder costs where possible. “Some businesses are doing well and have been doing well for some time. Some businesses are struggling in this environment and they will be facing higher cost pressures in this environment,” she told media. “I think the key message is that for those businesses who have the ability to see through temporary cost pressures, that would be really welcome in the longer run. Again, it’s up to each and every business to make their own decisions.”
The Bank is effectively asking small business owners to take a short-term hit to their profit margins. Its logic is that if businesses stay quiet on pricing now, it will prevent a long-term situation in which high prices become the permanent norm, eventually requiring even higher interest rates to fix.
Interest Rates Could Move in Either Direction
With the Official Cash Rate sitting at 2.25 per cent, the Governor refused to rule out either hikes or cuts at upcoming decisions. Market pricing currently suggests 75 basis points of hikes by year-end, though the RBNZ cautioned that low liquidity in financial markets may be distorting those signals.
The Governor described the Bank’s task as determining whether cost pressures were temporary or were becoming embedded. “We need to be really careful that we don’t overreact to what could be a temporary shock,” the Governor said, while stressing the bank stands ready to act if inflation broadens.
The next RBNZ monetary policy decision is scheduled for April 8, with a full forecast update to follow in May.
