The Reserve Bank of New Zealand’s (RBNZ’s) recent decision to cut the official cash rate (OCR) by 25 basis points has been generally welcomed by the Bay’s business community.
But observers have warned that the effects of the first OCR reduction in more than four years will take several months to work through the business community and the economy.
“What it brings us is a sense of hope really that the worst is behind us and we’ve turned the corner,” said Todd Muller, a former longtime National MP and Priority One’s current chairman.
He said although it sounds like a cliché, that’s really the crux of it.
“But businesspeople understand the fiscal dynamics of how monetary policy’s been playing out. We’ve had a lot of money in the system that needed to be controlled. It’s been painful and now we’re starting to go down the other side.
“But that doesn’t mean the pain disappears immediately.”
What it brings us is a sense of hope really that the worst is behind us and we’ve turned the corner. – Todd Muller
Services inflation still high
In its statement, the RBNZ said consumer price inflation was easing.
The RBNZ agreed to ease the level of monetary policy restraint by reducing the OCR to 5.25 percent. Services inflation remains elevated, but is also expected to continue to decline, both at home and abroad, in line with increased spare economic capacity, the RBNZ said.
Consumer price inflation in New Zealand was expected to remain near the target mid-point over the foreseeable future.
The pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target. In the aftermath of the cut, several New Zealand-based banks reduced various lending and deposit rates.
Andrew Watson, the Eastern Bay Chamber of Commerce’s general manager, said from their perspective it was going to be a while before they expected to see the impact of the cut.
“It’s positive, but it will probably be another three to six months before we see the impact,” he said.
“For us, the [previous] OCR has obviously affected spending, coupled with the high interest rates and that has had a flow-on effect on local business,” Watson said.
Many still struggling
“I think it’s going to be pretty tough for the next six months. There will be a flow-on effect and I think a lot of our businesses are really struggling.”
The local economy could probably expect to see more people able to buy houses. You’ll see households feeling like they’ve got a bit more money in their pockets and I guess critically too you’ll get businesses able to borrow more money to grow money. – Nigel Tutt
Priority One CEO Nigel Tutt said the local economy has still maintained some economic growth, even though the country as a whole had gone backwards.
“In Tauranga and Western Bay we notice some industries are really hurting, namely retail construction and retail hospitality,” said Tutt.
“We would expect the cut to interest rates to help all businesses, but particularly those sectors,” he said.
“It’s been painful and now we’re starting to go down the other side. But I would expect that you won’t really start to feel that impact until maybe next year.
“The local economy could probably expect to see more people able to buy houses,” he said.
“You’ll see households feeling like they’ve got a bit more money in their pockets and I guess critically too you’ll get businesses able to borrow more money to grow money.”
Eastern Bay Chamber’s Watson said he had recently read in the local paper that a couple of businesses had to close their doors because debts had mounted to the point where they just couldn’t continue to trade.
“I think we’re looking three to six months out before we see any impact of the cut,” he said. “We have yet to see the tail end of all this. “
Muller said that local businesspeople were now at least getting a sense that probably all things being equal, the economy would slowly improve.
“That should lead to more positive sentiment around employment and expansion and away we go again,” he said. “That’s certainly not the status quo, but we’re probably heading there.”
John McRae, a partner with Deloitte Rotorua, said the private sector had been struggling with high interest rates and hurting for some time.
It’s positive, but it will probably be another three to six months before we see the impact. For us, the [previous] OCR has obviously affected spending, coupled with the high interest rates and that has had a flow-on effect on local business. – Andrew Watson
“Certainly an easing in borrowing costs helps, but there’s still a lot of struggle ahead of us,” he said.
A lot of businesses were using their balance sheets to keep their businesses going, he said. Which meant that for many, interest rates were still high compared to when they were doing their business planning.
“This cut is more of a progress [move], but that’s not going to be significant enough [in itself] for businesses that have been hurting.
“My feeling is [the RBNZ] doesn’t want the economy to grow too much, because they don’t want to go through the pain of last time.”
