Nomura

The ratio of borrowing by US and European companies to GDP has fallen — some believe the impact of interest rate hikes is waning.

While interest rate hikes can also curb inflation by raising the cost of corporate borrowing for capital investment, the impact of policy rate increases on demand may be more limited than in the past.

This is because, since the COVID-19 pandemic crisis, the ratio of borrowing by non-financial corporations to GDP has fallen in various countries, and the net interest expense burden on companies is also lighter than before.

For example, in the United States, since the outbreak of the COVID-19 pandemic, large-scale fiscal transfers from the government sector to the private sector have led to non-financial corporations' cash and deposits as a percentage of nominal GDP reaching a historical high, while non-financial corporations' debt as a percentage of nominal GDP has declined.

From an overall economic perspective, as companies currently possess ample cash and deposits, their borrowing demand for capital investment appears to have decreased. The accumulation of corporate deposits has led to an increase in interest income, while interest expenses have been suppressed through controlled corporate debt, resulting in the net interest expense ratio for US non-financial corporations reaching a historical low.

This indicates that, from the perspective of US companies as a whole, it is unlikely that they will be unable to repay private credit and bank loans due to heavy interest burdens, and the risk of non-performing loan issues worsening and an overall economic credit crunch is extremely low.