OCR Cuts and Business Borrowing Costs

This chart clearly shows that cuts in the OCR have barely flown through to business borrowing costs.

The spread between the OCR and the interest rate charged for business finance has increased markedly since the beginning of the Global Financial Crisis.

Because the interest rate is a key driver of investment decisions, it’s clear that further cuts to the OCR would not accomplish much.

So what is driving capital formation? If that’s the driver of the economy, and unemployment is so high, surely that’s some evidence that employers are preferring capital intensive production processes over labour intensive ones.

When New Zealand is allegedly the best place in the world to do business according to Forbes Magazine, confidence and regulatory risk can’t explain how capital formation has barely shifted.

In addition to the barely noticeable changes in capital formation, industrial production (manufacturing, mining, utilities etc) is recovering at low levels. Much of this can be attributed to the continued commodity price bubble.

Lowering the OCR more won’t increase real output much or actual move the borrowing costs faced by businesses.

I contend that because of the nature of business finance – until your business is large you almost always have to offer personal guarantees or security over your home – we can’t predict how business owners exposed to that sort of “all-in” risk will respond to lower interest rates.

Why would they increase investment when it’s obvious banks have actually increased their margins since the global financial crisis began and are earning record profits, albeit on bubble lending?










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