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.
I guess you could fiddle with minimum equity rules - increase or decrease the proportion of the loan book that banks must have collateral to cover
What’s stopping people taking on additional debt from other providers though?
They would still need to be able to service that debt though right? It’s the same thing stopping people taking on additional debt ATM.
Most people aren’t using all their borrowing capacity. What stops those people taking on more debt is the unattractiveness of higher interest rates.
I like the idea where you have a compulsory Kiwisaver-type scheme which earners have to contribute to. So when you want to reduce spending in the economy, you simply increase the rate that earners have to put into the scheme.
People have less money in their pocket to spend, thereby reducing demand in the economy in a deflationary way.
But importantly, they get to keep the money that is invested, but access to it just gets deferred until they retire.
OCR isn’t only to decrease the borrowing in the economy. It also reduces the money supply therefore propping up the currency.
That would be regulation of the banks. I believe the OCR is simply the interest rate that the banks can borrow money from the reserve bank. The banks can lend out money at whatever rate they want, it’s just market forces that keep their rate at around the OCR.
In the current system of free market capitalism the banks have to be free to leech as much profit as possible from the people, no equitable regulation allowed.
