What does a cut to the Official Cash Rate mean for your business?

On 27 November 2024, the Monetary Policy Committee agreed to reduce the Official Cash Rate (OCR) by 50 basis points to 4.25%. This cut to the Reserve Bank of New Zealand (RBNZ) rate is aimed at improving the economic conditions in Aotearoa over the coming year.

But what is the OCR? And how will a drop to a 4.25% rate affect your small business?

What’s the Official Cash Rate? The Official Cash Rate (OCR) is the interest rate set by the Reserve Bank of New Zealand.

The OCR is a key economic tool that’s used to influence the overall level of interest rates in the economy. The OCR sets the rate of interest when New Zealand banks borrow from the Reserve Bank. This, in turn, affects the interest rates that banks charge on loans to their customers.

The key business pros and cons of the OCR cut

A cut to the OCR has both potential benefits and drawbacks for New Zealand-based small business owners.

Here's our breakdown of the possible implications for your business:

Potential benefits:

Reduced borrowing costs

A cut to the OCR means lower interest rates on loans, including business loans and mortgages. This could mean easier, and potentially cheaper, access to capital for your small business, helping you finance your planned growth initiatives, equipment purchases or operational costs.

Increased investment

With borrowing costs now dropping, it’s a good time to look for business funding and finance. With repayments lower, you could look to invest in expansion, innovation or hiring new employees (all key elements of growth for 2025).

Improved cashflow

With your loan repayments now smaller and more manageable, you free up cash for the business. This liquid cash can be used to reinvest in the business, cover your increasing operating expenses or build a financial buffer.

Boosted consumer confidence

A lower OCR can sometimes lead to higher consumer spending, with customers feeling they have more cash in their pocket. If you’re a B2C business, this can lead to boosted sales and increased revenue.

Potential drawbacks:

Slower economic recovery

The OCR is often used to stimulate economic activity, but, paradoxically, in certain circumstances, it can actually slow down recovery. A cut could benefit businesses in the long run, but a slower economic recovery may mean lower sales in the short to medium term.

Inflationary risk

Cuts to the OCR could lead to future inflation spikes. Lower interest rates lead to cheaper borrowing and more spending. As prices and spending rise, so will the rate of inflation. Potentially, this could increase operating costs for your businesses.

Uncertain impact on interest rates

The high street banks won’t always pass on the full OCR reduction to borrowers. It's important for you to shop around and compare interest rates between business banks, to ensure you're getting the best deal.

The medium and long-term impact of the OCR cut on your business will vary, depending on factors like the industry you trade it, access to capital, and your reliance on consumer spending.

Talk to our team about how the OCR cut may affect your business plans for 2025 and beyond

Here's some of the way we can help you:

• Review your loan options and whether refinancing makes sense.

• Plan for growth and extra investment, using the potential cashflow boost.

• Keep an eye on inflation rates and how to adjust your pricing.

• Keep up to date with the OCR and the major NZ economic situation.