As many economists predicted, the New Zealand Reserve Bank has raised the Official Cash Rate (OCR) by 0.25% today. The OCR was originally 2.5% and is now 2.75%. By the end of 2016, economists expect the OCR to be between 4% and 5%, as the Reserve Bank tries to limit inflation by lifting interest rates.
Rising house prices, increasing immigration and booming construction activity are all creating a lot of the inflation pressures. This pressure is being slightly eased by the high exchange rate on the kiwi dollar.
What does this mean for owners of small to medium enterprises (SMEs)?
We talked to Lisa Martin, Managing Director of GoFi8ure and Vice President of NZBAI (also winner of Bookkeeper of the Year at the Xero Partner Awards 2014) about what the Official Cash Rate means to New Zealand small businesses.
For many, the cost of financing their business will go up. NZ’s trading banks do most of their small business funding using mortgages as security. For example, a retailer who wants a bank loan to finance their stock will usually have to secure the loan against their house. The owner’s mortgage finances the business. This means that the cost of financing the business rises and falls as mortgage interest rates rise and fall.
SMEs have been riding out the effects of the global slow-down a few years ago. They are now starting to feel more confident about their growth prospects. This confidence will face a blow as increasing interest rates raise the cost of finance to the business. Higher interest rates will leave less money in the pockets of consumers, so SMEs will see likely see a slowdown in sales. Also adding to the financial pressure, employees of SMEs will have hopes for wage increases as inflation rises.
Owners of SMEs should consult their financial advisers to work out how they can combat these financial pressures. Accountants who use Xero are uniquely positioned to give timely and accurate advice to their clients.
By planning well in advance, SMEs should be able to continue to thrive as the Reserve Bank tries to put the brakes on NZ’s economic growth.