The Reserve Bank has cut the official cash rate (OCR) this month by 0.25% to a record low of 1.5% to put this in perspective in 2008 the OCR was as high as 8.25%.
The immediate benefits have been, a falling NZ dollar against the U.S. Dollar which is really good for exporters. The OCR is one of the many factors that control the exchange rate, a lower OCR results in a lower exchange rate which has been seen this month.
The other benefit is cheaper lending because the banks have reacted immediately and we are seeing lower interest rates for lending, great if you are wanting to borrow or want to re-negotiate your current loans.
What’s the down side?
New Zealand Businesses rely heavily on imports such as fuel and machinery. Anything you purchase in your business, that is imported, is likely to go up solely because of the drop in the exchange rate. The flow on effect is increased overheads and maybe your direct costs as well.
Another downside from the drop in the OCR is the interest received from the banks will decrease resulting in lower returns in your investments.
What we recommend & things to be aware of:
- Don’t pull your money out of the bank for higher interest rates in unknown riskier investment companies. Thoroughly do your research first.
- With any savings start reducing personal debt.
- Seriously consider technology in your business to provide better efficiencies because lending has never been so cheap & wages just keeps on rising.
- Negotiate your interest rates for Plant & Equipment. Especially if its above 8% because these institutions should have room to decrease their interest rates as it now costs the institutions less.
- Look at the opportunity of fixed rates, or a combination on your loans. Can the OCR drop any further? Interesting to see rates & trends around the world suggest it could, but would our Reserve Bank go lower? That’s crystal ball gazing, and experts have gotten it wrong many times over.
- Be aware of the direct impact of your costs going up and react accordingly. Look at Value Added Pricing, come in and have a session with us just around pricing so you don’t lose out on the benefits of the OCR drop.