MONEY MARKET “TIGHT”

Press, Volume LXXXVIII, Issue 26671, 4 March 1952, Page 6

MONEY MARKET “TIGHT”

MANX DEMANDS ON TRADERS

EFFECT ON RATES OF (By Our commercial editor.) The embarrassment felt by many firms at present through their lack of liquid funds and the allied problem of a threatened rise in interest rates are the Chief topics in commercial circles just now. Income tax and rate payments have to be made within a month of each other and the normal preparations to meet these annual demands have been upset this year by a flood of imports, calling for unusually high payments from traders, and by the credit restrictions. The result has been an increased selling pressure from many groups at once; retailers, wholesalers and importers have been trying since Christmas to get rid of stocks which have accumulated to a greater extent than at any time since the war. Many firms would no doubt prefer to hold back some of their stock for sale at a more opportune time, but the Reserve Bank's tightening of credit, carried out by the trading banks’ overdraft restrictions, leaves them no option. Retail turnover since Christmas, according to representatives of the retail trade who were approached, has been at a high level for this time of the year. The increased turnover, however, has not been high enough to enable shopkeepers to pay their fhcome taxes, to meet their normal Commitments and to find the increased amount due on their new stocks. Prevented from getting further money on overdraft, they have to raise the money in other lt was predicted last week that a higher proportion of income tax than Usual Would be unpaid by the due date this year. , , The investments of the larger trading concerns in gilt-edged stock and shares have, in many cases, been sold to meet the threefold demand for money—to reduce their overdrafts, to honour their trading commitments and to nay their taxes and rates. The stock exchange, a useful barometer of commercial trends, records this selling pressure as a steep drop in share prices and a corresponding increase in the expected returns of the lucky minority who at present have money to invest.

4 Pet Cent. Investments Eleven Government ' stocks were traded on New Zealand stock exchanges on Friday. The prices paid for these will give the buyers a yield on the redemption date (allowing for brokerage) of £3 16s to £4 0s 8d for every £lOO invested. These yields give an indication of the present-day value of money; the interest rate on gilt-edged investments is between 3.8 per cent, and just over 4 per cent. This is only one of several classes of interest rates, of which bank rates, mortgages and savings bank interest are other examples. All classes of interest are influenced by the same factors and move in sympathy; and interest, being a return for money invested, affects all forms of investment. A higher interest rate, for instance, tends to force up rents and to discourage business activity. Local bodies requiring finance for capital works are at present restricted to a maximum interest rate of 3} per cent. A year ago they had little difficulty In raising money at this rate but in the last few months the demand for this type of Investment has steadily fallen. If the Government decided to issue a new loan at present it would undoubtedly find the public reluctant to invest in it at a rate lower than 3} per Cent. The Government, as the largest borrower in the community, has a direct interest in maintaining the interest rate at its present level, and it Was ho doubt With this in mind that Mr Holland spoke last week oi the Government’s “intention not to let interest rates get out of hand.” The Government has powers over both / the supply and demand for money and can therefore influence interest rates to a certain extent. The creation of more “paper money” by the Reserve Bank would ease the demand for money and thus lower the interest rate; but the present Government’s declared policy is against this measure. A more likely step would be the imposition of stricter restrictions on new capital issues, thus preventing any further demand for money. If Government and local bodies’ demands on the money market were also restricted the interest rate Would fall.

Signs of New Trend There ate Indications that the present crisis in the money market may have reached its worst and that a return to more normal activity may reverse the present tendency towards higher interest rates. Retailers have, for the greater part, paid their ihcome tax; traders, who began to call a halt to their imports as far back as last October, have now received most oi their goods on order; woolgrowers throughout the country are being paid, or are about to be paid, for wool sold at this season’s sales and in the next few days Canterbury growers alone Will be paid nearly £3,000,000 for wool sold at the last Christchurch sale; and the trend on the stock exchange towards the end of last week encourages the cautious prediction that share prices have reached their lowest level. Informed businessmen do not foresee any immediate buying orgy which would cleai- surplus stocks in a week or two and miraculously restore business almost overnight to stability; the pattern of trade is expected to be a sales volume perhaps rather lower than normal but nevertheless sufficient to reduce most surpluses before the middle of the year. “Thh difference between a surplus and a shortage in New Zealand has always been a knife-edge.” said one trader, who predicted that isolated shortages would be occurring by June or July. New Zealand’s economy is based on primary production and while the prices for wool, meat, ahd dairy produce remain at their present levels there can be little fear of $ long-con • tinued recession.

Primary Produce Prices The latest report on the realisation of a wool sale--the Auckland sale ot seven weeks ago—shows that prices for this commodity are now on a level With those of the 1949-50 season. The average price at this sale was 41.350 per lb. which, most farmers will agree is a reasonable return. Prime lambs now fetch 16Jd per lb at South Island freezing works and, eveh if the farmers are unsuccessful in their attempts to get the full benefit of the increase recently announced under the btnk purchase agreement with Britain, they are assured of the maintenance of the present price for years to come The increased guaranteed price for dairy products gives the farmer a return of nearly 3s per lb fur butter-fat —the highest price yet.