The Reserve Bank just raised rates for the first time in 3 years. Here's what it actually means for your business.

Let us break it down for you.

This was a knife-edge call.

You had economists from all the big banks and financial outlets split right down the middle. Half thought they'd hold. Half thought they'd raise. 

In May, she held. That was a split decision - she looked through the war in Iran and said, "We'll wait and see."

This time? Unanimous. Every member of the committee voted to raise.

So what changed?

Inflation is currently sitting at 3.1% which is just outside the Reserve Bank's target band of 0-3%. Anna's new in the job. She wants to meet her KPIs. And the only tool she has to bring inflation down is the OCR.

But here's where it gets interesting.

The Transitory Problem

Remember a few years ago when central banks around the world said inflation was "transitory"?

Yeah. About that.

It was not transitory. It was a sticky little problem that took years to bring under control. And now the Reserve Bank is saying they're "looking through" the war in Iran, essentially calling it transitory.

I'm having flashbacks.

Because we've seen what happens when central banks get this wrong. They wait too long. Then they have to raise rates aggressively to catch up. And the people who pay the price are business owners and mortgage holders. Not the economists making the predictions.

So when the Reserve Bank says they're looking through geopolitical events and expecting inflation to come down, I'd take that with a grain of salt.

The K-Shaped Economy

Here's the thing that most people miss when they talk about OCR increases: the OCR is a blunt instrument.

It doesn't affect everyone equally. Not even close.

Think about it this way. Baby boomers, who are one in five New Zealanders and hold 62% of the wealth, largely own their homes outright. Two-thirds of people over 65 own their property. They're not impacted by an OCR increase.

In fact, they're celebrating it. When the OCR goes up, term deposit rates go up. I got two notifications on Thursday saying my savings rate had increased. For people with money in term deposits, this is quite nice.

Meanwhile, millennials and younger generations are the most indebted generation in history. They're more likely to have three forms of debt: mortgage, credit card, and buy now pay later. They don't have the wealth. They feel every basis point.

This is what economists call the K-shaped economy. The top of the K, baby boomers with wealth, term deposits, and paid-off mortgages, keeps going up. The bottom of the K, younger people with debt and no assets, keeps going down.

And the OCR? It's supposed to slow down spending. But how is it going to stop a baby boomer from going on their overseas holiday? From buying things? From doing the repairs on their investment property?

It's not. Because they don't have a mortgage to worry about.

What This Means For Your Business

So what does a 0.25% increase actually mean for business owners?

First, let's be clear about the numbers. The banks have already passed on the increase to floating mortgage rates. Term deposit rates? That'll take a while. Because of course it will.

The Reserve Bank has flagged another 50 basis points between now and the end of the year. So we know we're heading to 3% by December. That's the trajectory.

Now here's what I want you to think about as a business owner.

Who is your customer?

If you're selling to millennials and younger people, people who are already stretched, already carrying debt, already feeling the squeeze, you're going to face headwinds. Their discretionary spending is going to tighten further.

But if you're selling to baby boomers. People who don't have a mortgage, who are earning more on their term deposits, who have the wealth and the time to spend it? You might actually find opportunity in this environment.

This is why I keep banging on about understanding your customer. Not just "anyone who will buy my product." But specifically who has the money, who has the problem you solve, and who values what you offer enough to pay for it.

The All Blacks hospitality packages sold out. Twelve hundred people paying $10,000-$20,000 to watch rugby in South Africa. Those aren't millennials on buy now pay later. Those are people with money who value the experience.

Who are your version of those people?

The Indecision Problem

Here's what really frustrates me about how business owners respond to OCR news.

They use it as an excuse for indecision.

"Oh, the OCR went up. I'll wait and see what happens."
"Interest rates are rising. Maybe I'll hold off on that investment."
"The economy's uncertain. I'll just sit tight."

And then they sit. And wait. And nothing happens. Because nothing happens when you do nothing.

The Reserve Bank has flagged where rates are going. We know it's heading to 3%. That's not a surprise. That's not uncertainty. That's a known trajectory.

So run your numbers. Model out what your debt costs at 3%. Understand your exposure. And then make a decision and get on with it.

The biggest risk for business right now isn't the OCR. It's indecision. It's being so distracted by the noise - the economists, the commentators, the pub conversations with people who have no idea what they're talking about - that you forget to actually run your business.

The Reserve Bank's Own Problem

Here's something that made me laugh when I saw it.

The Reserve Bank of Australia - whose job is literally to control inflation - has staff who are pushing for pay rises of 3% per year. Their argument? It won't keep up with inflation.

Let that sink in.

The people responsible for keeping inflation within the 1-3% target band are saying their own wages won't keep up with inflation. Which means either they don't think they can do their job, or they think inflation is going to stay higher than their target for longer than they're admitting publicly.

I don't know if that's funny or terrifying. Probably both.

The Ford Ranger Reality Check

We talk about Ford Rangers a lot on this podcast. And there's a reason for that.

The Ford Ranger has become the symbol of business owner aspiration in New Zealand. Everyone wants one. And a lot of people are financing them at 11-12% interest.

Here's the question you need to ask yourself: if you can't afford the Ranger at 11% finance, you probably can't afford it at 12% either. So what are you doing in your business to generate enough margin to afford the things you want?

Because interest rates are always going to move. They go up. They come down. They go up again. That's the nature of monetary policy.

What you can control is your revenue, your margins, your costs, and your decisions. Focus on those. Build a business that can absorb rate movements without falling over.

That's not exciting advice. But it's the right advice.

The 17-Year-Old Window Cleaners

I want to leave you with this story, because it perfectly captures what I think the right response to economic uncertainty looks like.

I spoke to some young kids this week. Seventeen years old. They're making between $800 and $1,000 a day cleaning windows in Canterbury.

Their business model? Knock on the door. Ask if they want their windows cleaned. Clean the windows. Get paid.

No AI strategy. No digital marketing funnel. No SWOT analysis. No waiting for the OCR to come down before they start.

They identified that people value clean windows more than they value the time it takes to clean them. They went to those people. They asked for the business. They did the work.

That's it. That's the whole strategy.

And they're making $800-$1,000 a day at 17 years old while economists debate whether 0.25% is going to slow consumer spending.

The Bottom Line

The OCR has gone up. It's going to 3% by the end of the year. The banks will pass it on to mortgage holders immediately and drag their feet on term deposits. Baby boomers will be largely unaffected. Younger, more indebted Kiwis will feel the squeeze.

For business owners, the message is simple: understand who your customer is, model your debt exposure at 3%, and stop using economic uncertainty as an excuse for indecision.

The 17-year-old window cleaners aren't waiting for perfect conditions. They're out there knocking on doors.

Maybe it's time you did the same.

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This article is based on insights from the Next Advisory podcast, where Luke and Phil help New Zealand business owners navigate economic challenges and build better businesses. Visit nextadvisory.nz to find out how we can help you.

Checkout more of our blog content at https://nextadvisory.nz/podcast