Pictured above: Adrian Orr.
Yesterday’s 25 basis-point OCR cut is expected to offer crucial relief to businesses struggling with high costs and economic uncertainty. While the decision provides a glimmer of optimism, experts caution that recovery may be gradual as the effects of lower interest rates take time to manifest.
On August 14, 2024, the Reserve Bank of New Zealand (RBNZ) made a pivotal decision to reduce the Official Cash Rate (OCR) from 5.5 percent to 5.25 percent. The date, a significant one as it’s the first reduction in more than four years. This move marks a crucial moment for New Zealand’s economy, offering a glimmer of relief for businesses grappling with a challenging economic landscape.
A challenging climate that’s set to continute for a while longer with the August MPS predicting the country is in the midst of a two-quarter contraction which will see the economy shrink 0.4 percent this calendar year, down from 1 percent growth in May forecasts. Unemployment is now expected to climb to 5.4 percent in the upcoming summer, compared to a peak of 5.1 percent forecast in the previous statement.
RBNZ’s rational and economic context
The Governor of the Reserve Bank of New Zealand, Adrian Orr’s announcement is underpinned by several key economic observations. Annual consumer price inflation is now returning to within the RBNZ’s target range of 1 percent to 3 percent. This shift is attributed to a combination of factors, including easing inflationary pressures both domestically and internationally. The RBNZ highlighted that inflation expectations, firms’ pricing behaviour, and various core inflation measures align with a stable, low-inflation environment.
However, the RBNZ also noted that economic growth remains below trend. While global inflation continues to decline, it remains elevated in some service sectors. Domestically, economic indicators suggest a broad-based weakening in economic activity, which has prompted the RBNZ to ease monetary policy restraint.
“The decision to reduce the OCR to 5.25 percent reflects our confidence that inflation is returning to the target band,” says Orr. “The pace of future easing will depend on continued stability in pricing behaviour and inflation expectations.”
Impact on business confidence
The OCR cut has been met with cautious optimism from various quarters of the business community. Alan McDonald, Head of Advocacy at the Employers and Manufacturers Association (EMA), describes the reduction as a small but crucial boost for business confidence. “Businesses have been under severe financial pressure,” McDonald says. “The OCR cut provides some relief and may help many businesses hold on until the economy starts to recover.”
McDonald points out that previous high OCR levels had led to increased costs and financial strain on businesses, contributing to record levels of redundancy and restructuring calls. The reduction in the OCR, he adds, is a step in the right direction, although it may take time for the benefits to be fully felt.
“Businesses are fighting for survival, and this OCR cut may be the positive signal that keeps them from throwing in the towel and halt further job losses.”
Philip J Wicks, Director at SME Growth Strategist and Founder of Small Business New Zealand – a support hub for small business owners – says he’s talking with business owners everyday as they navigate the current economic climate. “The OCR reduction, coupled with banks promptly cutting interest rates, has been met with a positive response from many business owners.
“The general sentiment is one of cautious optimism. The lower rates provide immediate financial relief, which eases cash flow pressures and enables better planning for the future. This reduction also injects a degree of confidence back into the market, especially for businesses that have been on the fence about capital investment or expansion. The consensus among business owners is that while challenges remain, this move creates a more favourable environment for growth and sustainability in the near term,” he says.
He does reiterate that things are for the most part still fairly flat for many businesses, but most are now starting to feel that things will gradually start improving over the next few months. “I also feel this as well.”
Surprising move
The RBNZ’s decision came as a surprise to some analysts and market observers. The New Zealand Institute of Economic Research (NZIER) noted that while there were signs of easing capacity pressures, the central bank’s concern about non-tradable inflation had led many to anticipate a more cautious approach.
NZIER’s Chief Economist, Christina Leung, remarks, “The RBNZ’s decision to cut the OCR now, rather than waiting until November as some had expected, highlights their concern about the recent softening in economic activity. With inflation returning to target and signs of weaker global demand, the RBNZ’s shift to a dovish stance aligns with the broader economic signals.”
Leung further explains that while the OCR cut is a step toward easing monetary conditions, the central bank’s future actions will depend on ongoing inflation developments and firms’ price-setting behaviour.
Regional perspectives: Canterbury’s reaction
In Canterbury, the OCR cut has been received with a sense of relief. Business Canterbury Chief Executive, Leeann Watson, emphasises that the reduction provides immediate relief amid ongoing cost pressures. “Since February 2023, businesses have faced significant challenges from rising costs, particularly driven by high interest rates and inflation,” Watson says.
Watson highlights that while the OCR cut signals a potential easing in cost pressures, many businesses are still struggling. “There’s light at the end of the tunnel,” she added. “However, businesses are still facing challenges and a generally weaker performance outlook.”
Business Canterbury’s quarterly survey, which will be open for responses later this week, is expected to reflect some cautious optimism and improved business confidence following the OCR announcement.
Read more: Navigating economic headwinds: Insights for SME owners
Looking ahead: future implications
The RBNZ’s decision to reduce the OCR is a calculated step toward supporting the economy amid a complex economic environment. With global and domestic conditions evolving, the central bank’s future policy decisions will likely be influenced by ongoing inflation trends and economic activity.
The easing of monetary policy is expected to provide some relief to businesses, potentially improving financial conditions and consumer confidence. However, as the EMA’s McDonald and Business Canterbury’s Watson note, businesses should remain prepared for a gradual recovery rather than an immediate turnaround.
The OCR cut to 5.25 percent represents a strategic move by the RBNZ to temper monetary restraint in light of improving inflationary conditions. While the immediate impact may be modest, it offers a hopeful sign for businesses navigating a challenging economic landscape. As New Zealand continues to adjust to evolving economic conditions, the central bank’s actions will no doubt play a critical role in shaping the path to recovery.
