This is probably a stupid question but… So I understand how the government uses the OCR to increase interest rates and drive inflation down by reducing the borrowing in an economy. What I’ve been thinking about recently though is could there be a mechanism whereby instead of the interest rate increase being solely at the cost of the borrower (rate increases > you pay more interest on the same total borrowing > total cost of borrowing over time increases) that some ‘minimum principal’ payment rate was increased instead.

So the idea being that if the OCR was 0.25 in 2020 and is 5.5 now, could that 5.25% increase (and thereby the decrease in overall borrowing) have been achieved through a minimum principal pay down rate instead. Borrowers are still paying more and therefore borrowing less, just that the banks and reserve bank don’t have a greater take and new Zealanders end up with less total borrowing.

  • w2qw
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    1 year ago

    Most people aren’t using all their borrowing capacity. What stops those people taking on more debt is the unattractiveness of higher interest rates.