What is new today, however, is that lower interest rates in capital markets are increasingly being transmitted through the entire financial intermediation chain. Lower funding costs for banks have started to influence the cost of borrowing for households and companies. As bank lending rates are being reduced, new investment projects – previously considered unprofitable – become attractive.
In the short-run, this should sustain the demand for credit and investment. Indeed, the banks covered in our Bank Lending Survey confirm that the easing of lending conditions is progressing hand-in-hand with a resurgent demand for credit to finance business investment. In the longer-term perspective, this will increase potential output.