Limitoo News

'Time for being a little bit more cautious' as inflation pinches

Some companies could be in for a rough time as interest rates soar in response to high inflation.

Businessman in the supermarket at inventory with checklist in the vegetable department
Photo: 123F

The Reserve Bank is set to take aggressive action to combat inflation with economists forecasting interest rate hikes until 2024.

The latest annual inflation rate hit 6.9 percent - the highest it has been in three decades.

But it won't only be households that face the pressure from rising interest rates, company earnings will also take a hit.

Craigs Investment Partners head of private wealth research Mark Lister said the level of damage to company earnings will depend on how much they have in debt.

"Just like households or people like you and I, many businesses big and small will have debt - they'll have borrowings. And if interest rates are going up those borrowings will cost them more to service. So that's an added cost and is something that eats into profitability.

"Not dramatically so [because] most of the companies on our share market are pretty well sorted in terms of funding."

Craigs Investment, Christchurch.
Craigs Investment, Christchurch. Photo: RNZ / Alexander Robertson

Lister said consumers putting their wallets away as the cost of goods increased could also affect company earnings.

He believed the Reserve Bank could push through a few more Official Cash Rate (OCR) hikes with the economy able to absorb the pressures.

"I think 2023 is the one to watch when you talk about where the pain may or may not come, and you know anything can happen between now and then.

"But when I look at this year, I see high inflation which will continue and which will mean the Reserve Bank has to keep raising the OCR and keep trying to knock that inflation on the head," Lister said.

It would be "okay" this year because of the country's strong economy and low unemployment, he said.

"[Next year] is where it gets a little bit more interesting, because by that point you could have actually seen the economy come off the boil a little bit. Maybe house prices have fallen, maybe unemployment has gone up a little bit, things could be looking a little more fragile here and overseas.

"That could put us in quite a difficult position if inflation is still higher than we would like and if those interest rates still need to remain [at] high levels. So it's definitely a time for being a little bit more cautious than we otherwise would," Lister said.

source: https://www.rnz.co.nz/news/business/465899/businesses-likely-to-feel-the-pinch-of-inflation-now-and-into-2024