WHEN the Reserve Bank announced an emotive 50-point cut to the official cash rate (OCR), it should have sent tremors through NZ Inc.
A cut to floating rates will be a welcome move for an economy heavily reliant on overseas funding, but it comes with inflationary concerns that will flow through
to the employment sector.
These concerns will ultimately drive wage increases because Joe and Jane NZ are faced with escalating prices for petrol, food basics, rent, local authority rates and so on.
With a global financial crisis and a homegrown recession, employees have, until now, accepted the argument that businesses can't afford pay increases. But this won't last forever and there are already signs in the public sector that this argument will no longer hold sway.
Faced with continued increases in basic living costs, middle-class New Zealand's discretionary income is under extraordinary pressure.
So, what does the OCR cut have to do with wage increases?
Firstly, it is only a temporary measure, with the country's credit rating on notice and the Government's willingness to borrow and spend the country's way out of a double dip recession.
This means floating rates will rise, the Reserve Bank will have no choice as inflationary pressures flow through to wage increases.
In the short term, this places even more pressure on households.
Businesses are also under extreme operating pressure with confidence on shaky ground during the first quarter of 2011.
Will this cut in the OCR really offer any relief to small to medium-sized businesses fighting to maintain the status quo through a recession, with another beige year on the horizon?
How are businesses expected to fund such wage increases, with many sectors still only just keeping their heads above water?
Expect your employees to start muttering and waiving 5 per cent inflation figures under your nose. Expect new employees to negotiate even harder on their starting salary or hourly rate. Expect an increase in labour costs and start planning for it.
From the outside, the OCR cut could be seen as a positive move. But the flow-on effect for employers will need to be planned for.
- Kellie Hamlett is the director of Talent ID recruitment agency
