April 11, 2024

How does the OCR impact NZ Business Owners?

AUTHOR

Claire Bryant

With yesterday’s announcement that the OCR remains unchanged, we are very much in a holding pattern until inflation gets back to its target range between 1% – 3%.

Based on the Reserve Bank governor’s comments, it seems unlikely there will be any more rate hikes in the near future. Although it remains unclear when the rate will start to drop again, the market is factoring in cuts from August, which would slowly begin to lower the burden on cash-strapped mortgage holders and hopefully improve waning consumer demand. Any rate cut will take time to have a tangible effect, but hopefully, any move would help change some of the gloomy business sentiment out there.

 

What exactly is the OCR?

 

The OCR, or Official Cash Rate, is an interest rate set by a country’s central bank, like the Reserve Bank of New Zealand. It’s used to influence borrowing costs throughout the economy. When the OCR goes up, it becomes more expensive to borrow money, which can help slow down spending and inflation. On the other hand, when the OCR goes down, borrowing becomes cheaper, encouraging businesses and individuals to spend and invest more. Essentially, the OCR acts as a tool to manage economic activity by adjusting the cost of borrowing money.

 

How does the OCR impact NZ Business Owners?

 

  • Changes in the OCR influence borrowing costs for businesses. When the OCR increases, banks typically raise interest rates on loans and credit, making it more expensive for businesses to borrow money for investments, expansions, or operational needs. When the OCR decreases, borrowing costs tend to decrease, making it more affordable for businesses to access funds for growth initiatives.

 

  • Movements in the OCR can affect consumer spending and confidence levels. Higher interest rates and subsequent increased cost of mortgage repayments resulting from an increased OCR may lead to reduced consumer spending, impacting businesses that rely heavily on consumer demand. A lower OCR can stimulate consumer spending, benefiting businesses across various sectors.

 

  • The OCR influences exchange rates, impacting businesses engaged in international trade. A higher OCR tends to strengthen the local currency, making exports more expensive and imports cheaper. A lower OCR can weaken the currency, potentially boosting export competitiveness but increasing the cost of imported goods.

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