New Zealand’s small and medium businesses face higher borrowing costs for the first time in 3 years following a hike in interest rates, but there is cause for optimism as the Reserve Bank signals the nation is back on the road to economic recovery.
The RBNZ has raised the official cash rate from 2.25 per cent to 2.5 per cent, in line with market expectations. It’s the first movement since October and the first uptick since April 2023.
The unanimous decision comes as the Board continues attempts to bring inflation under control while also protecting green shoots in the recovering economic landscape.
“We do think that a 25 basis point hike is a well-balanced approach both to bring inflation back down but also still provide stimulus for growth going forward,“ says Reserve Bank Governor Anna Breman.
The Board has flagged further rate rises are on the cards, putting more pressure on small business budgets.
Why The RBNZ Opted For An Interest Rate Increase
The official cash rate is the Reserve Bank’s main tool for keeping inflation in the target 1-3 per cent band, although it is generally regarded as a blunt instrument that needs to be wielded delicately.
A key factor in the Board’s balancing-act decision has been the ceasefire in the Middle East, after the Iran conflict drove up energy prices and inflation earlier this year. The partial reopening of the Strait of Hormuz has caused global oil prices to fall markedly, easing pressure on households and businesses, but the Bank expects the effects of the shock to linger for some time.
“The inflation outlook has improved since May, however the Committee remains focused on ensuring that recent cost increases do not become embedded in wage and price-setting behavior,” says Governor Breman.
The RBNZ believes inflation has peaked at 3.9 per cent in the June quarter and is now on its way down, forecasting the CPI will return to 2 per cent by mid-next year.
This would be welcome news to small and medium business owners. “High inflation erodes purchasing power so for households to feel like they can consume again and invest, we need to get inflation back down,” Governor Breman says. “That would also increase demand in the sectors that have been struggling.”
The Economy Can Now Restart Its Recovery
New Zealand’s economy was recovering from recession before the Middle East conflict stalled its trajectory, and the easing of the crisis means that recovery can resume. The RBNZ projects domestic growth during the September quarter, which is underway.
“The strength in the New Zealand economy is gaining momentum. We’re seeing it rebounding now as oil prices are falling,” says Governor Breman.
This is backed up by ANZ’s latest Business Outlook, which reports confidence had started improving even before oil prices began to drop. “While times remain uncertain, firms appear to be more optimistic about what lies ahead, and generally more willing to invest and employ,” the ANZ’s economists write. “While headwinds persist, this month’s survey offers hope that firms and the broader economy can to some extent pick up where they left off before the oil price spike.”
The Governor notes that inflation returning to 2 per cent would not only improve economic growth, it may also strengthen the labour market, since unemployment remains high by recent standards.
In the meantime, the lower New Zealand dollar keeps exports competitive in an improving global economy, and provides a potential boost for businesses in agriculture, tourism, and manufacturing.
Businesses Play A Role In Keeping Inflation At Bay
The Reserve Bank is watching the global economy closely, observing that while improvements could benefit New Zealand, a flare-up of the Middle East conflict would inevitably reignite inflation.
There are other variables, including the potential impact of El Niño on agriculture and, significantly, the role of businesses in price-setting.
“It’s a challenging environment for firms,” acknowledges RBNZ Chief Economist Paul Conway. “Demand conditions are restricting the ability of businesses to pass on costs.” Yet many have eroded their capacity to absorb higher costs. Also, if businesses decide to keep prices high to rebuild margins once costs ease, that would also put pressure on inflation, he says.
For SMEs factoring higher loan repayments into budgets, the message from the Reserve Bank is direct: “While further OCR increases appear likely at upcoming meetings, their timing is highly uncertain.” The Board favours a ‘neutral’ position, which may mean an OCR closer to 3 per cent.
The next OCR decision is due on September 2.
