Wed. Feb 8th, 2023


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What rising interest rates and inflation will mean for NZ business

2 min read

Rising interest rates and inflation could have short and long-term impacts on New Zealand business, and how companies report their results, consultancy PwC says.

Companies will need to respond to these risks, which could lead to changes in risk assessment, business plans and even longer-term strategy, PwC said in a report.

Among the possible impacts were reduced margins from increased labour, production and other costs, the suitability of existing agreements given rising costs such as lease agreements or fixed-price contracts, and financing arrangements – including banking covenants.

There was also the risk of increasing costs of capital projects, financial risk management (including foreign exchange risk) and hedging strategies set for a low-interest rate environment.

“Do short and longer-term business plan assumptions including returns to investors remain appropriate?” PwC said.

“How will key performance indicators and ratios change and are there any potential credit rating impacts?”

Rising interest rates and inflation will have various short-term effects.

These include both interim and annual financial reporting and operational decisions made in response as well as longer-term financial reporting.

Companies may now decide to undertake more significant economic hedging activities than when interest rates were falling, or relatively flat, PwC said.

This could mean that the associated accounting implications are more material and subject to increased focus from stakeholders including auditors.

Karen Shires, PwC’s chief risk and reputation manager, told the Herald high inflation and rising interest rates would be a challenge for business on all fronts.

“You have got increasing costs, not just from inflation, and interest rates going up, but then you get those costs going up from the supply chain challenges,” she said.

“All of those things cause problems which could lead to reduced margins, so if you are not earning as much, that’s a problem.”

The higher interest rate and inflation environment could have accounting implications for some.

She said companies would need to stand back and ask if their financial arrangements have become onerous and whether they need to be renegotiated.

There was also a greater risk that some intangible assets – such as goodwill – could become impaired.

As was the case when Covid-19 first emerged, greater disclosure and transparency with shareholders and investors was beneficial, she said.

“It’s important that companies remember their continuous disclosure obligations under NZX rules as well,” she said.

In a high-inflation, rising interest-rate environment, Shires expected companies’ banking covenants could become an issue for some, as would asset impairment.

“It’s a very different set of economic conditions that we are facing into.”

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