In recent months there’s been a good deal of speculation that New Zealand's Office Cash Rate (OCR) might drop below zero next year. It's already sitting at 0.25% and it’s expected to move downwards to stimulate activity in the economy.
But how does that help businesses to recover from what’s been a massive loss due to Covid?
Kiwibank economist, Jarrod Kerr recently said "the negative OCR accompanied with highly effective funding for the lending programme will create more supply of credit (loans). But the supply of credit is not the problem. Businesses are simply unwilling to load on more debt in highly uncertain times. With the end of COVID unknown, it is understandably difficult for businesses and households to plan 9-12 months."
It is going to be hard to imagine how the next 12 months will play out as businesses will experience a reduction in income due to low economic activity in the market. Even with low interest rates making borrowing more attractive, how much more debt will businesses be willing to take on to stay afloat?
One of the biggest questions for businesses who are prepared to take on more debt would be, what would the outgoings and repayments look like once the OCR increases again? Would they be generating enough profit to keep servicing the debt?
Read more about the Official Cash Rate here.
