BANK RATES.

Auckland Star, Volume LXVI, Issue 180, 1 August 1935, Page 6

BANK RATES.

In the present rudimentary condition of central banking in -New Zealand, the change in the discount rate of the Reserve Bank, announced at the end of July, is of academic interest only. There is no discount market in which the rate can be made effective, and so influence the lending , rates of the trading banks. Therefore an announcement that the Reserve Bank is now prepared to discount commercial bills at 3|, instead of 4 per cent, is nothing more than an indication that the Bank considers the general interest level is now one-half per cent lower than when it opened its doors a year ago. It has said as much in explaining that the change in its rate need not be reflected in the rates of the trading banks. So there can be only one reason for announcing changes in the Reserve Bank's discount rate, namely, that the Bank wishes to make the rate at least a useful index. During the past twelve months the trading banks have experienced difficulty in finding profitable outlets for their funds in the Dominion, and considerable transfers have been made to London, where the investment facilities are such that the banks can earn some' return while keeping their resources in a liquid condition. As soon as investment opportunities increase in New Zealand these transferred funds may be expected to flow back. Meanwhile rates are likely to remain low for credit-worthy borrowers, and the Reserve Bank .gives a hint that they may go lower. Cheap money is one of the strongest forces towards recovery. It has been a powerful influence in Britain and Australia, and lately New Zealand has begun to feel the upward pressure. Everyone benefits when interest falls; governments and local bodies reduce the charges on their debt; industries and private borrowers do the same, and as the fall spreads, taxes, rates and costs of production are adjusted to a lower basis. The movement has lagged somewhat in this country because of the mortgage problem, but already the savings in interest to public and private debtors, as compared with a few years ago, must run into millions. It is now the farmer's turn to share in the gain, and if while his costs are falling his income rises, through improvement in export prices, his difficulties should be quickly overcome.