Hawke’s Bay agribusiness partner Michelle Turfrey.
Hawke’s Bay agribusiness partner Michelle Turfrey.
Opinion
With the latest Official Cash Rate (OCR) increase to 5.5 per cent, Reserve Bank of NZ (RBNZ) Governor Adrian Orr has indicated he is not likely to rise the OCR any further and will track spending trends and potential further impact on inflation.
However, there is still likely to be pressure on inflation due to the following:
Immigration is up.
New offshore funds arriving into NZ from re-insures, to cover claims for recent large weather events.
Recent NZ Government budget spending announced.
International visitor numbers are increasing.
While the RBNZ has given indications that it isn’t looking to increase the OCR based on the above, it could likely stay at current levels for some time.
Therefore, it would be prudent to review and consider structuring debt to minimise interest rate risk as opportunities arise. Some factors to consider when looking at structuring new debt or restructuring existing debt include:
Cashflow – what are the repayments (interest and principal) likely to be, and what can you currently afford?
Interest rate certainty – what level of interest rate certainty do you need based on your forward plans?
Planned principal repayments – what do you plan to repay as principal (the amount borrowed or debt level) in the short term?
There is no point in locking all debt in for the long term if you have a plan to repay a certain amount of principal in the short term. A risk of being on a floating interest rate is you don’t take the opportunity of locking in a lower fixed rate(s) available and could potentially end up paying a higher interest cost. If you don’t intend to repay large amounts of principal in the short term, it is a questionable strategy to have a large portion of principal exposed to a floating interest rate. Considering the above makes good business sense in actively managing your risk profile with your bank and your relationship with your personal banker.
Some areas to work on include:
• Setting realistic budgets – working with an adviser can assist with this.
• Regular catch-ups with an advisor to compare actuals to budgets .
• Cashflow reporting – managing cashflow and reporting on this.
• Planning for what-ifs.
• Ensuring drawings and unnecessary expenditure are kept to a minimum.
• Keeping your bank updated on any changes in circumstance as they occur.
• Doing what you say you will do.
Disclaimer: Findex NZ Limited trading as Findex. The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.
