BANK OF NEW SOUTH WALES

Press, Volume CIII, Issue 30630, 22 December 1964, Page 21

BANK OF NEW SOUTH WALES

PRESIDENT’S ADDRESS At the Ordinary General Meeting of the Bank of New South Wales, held in Sydney on 18 December, the chairman, Mr. John Cadwallader, President of the bank, moved the adoption of the Report and Balance Sheet, The following is extracted from his address.

At this stage a year ago the Australian economy offered a springboard for renewed growth and expansion. The hopes which were entertained then have been amply fulfilled so far. The problem now is to consolidate the progress and to build further on it in face of gathering evidence of inflationary dangers. At several points of the economy, pressure is mounting, labour is in short supply, and costs and prices are rising again after a few years of welcome stability. The new defence program, too. will exercise a greater strain in the course of the next few years. But the current phase reveals a remarkable absence of speculation and shows no sign of getting out of hand. The estimated gross national product rose by over 9% in 1963/64 following an increase of nearly 8 % the year before. These figures represent a rate of growth which compares more than favourably with any period of the 'fifties. Following sustained recovery from the recession of 1960/61, the strong expansion of the economy in the past year was augmented by high export prosperity. In the current year, however, the rate of growth is expected to be lower, if only because exports are unlikely to rise and because industrial capacity and the labour force are now more fully utilized.

Australia's international reserves will fall this year, but the decline should call for no drastic or sudden action. The greatest concern for the future balance of payments lies in the external position of the United Kingdom. The direct impact of the British situation on Australia is less than it used to be, but Australia still holds the major part of its international reserves in London, and also any weakness in sterling is bound to disturb the whole current of world trading and financial relationships. It is therefore of prime importance that Britain should recover its economic strength. Dangers in Cost Strncture The most critical aspects of the Australian economy at present lie in the realm of the cost structure. In the past six months the retail price index has risen more than at any period since the boom of 1960, and has disturbed the pattern of stability. In conditions of labour shortage and of occasional shortages of materials it is likely that further price increases will occur. The supply of labour has been tight for some time and the pressure is evident in a growing degree of industrial unrest. Wage costs are also increasing, largely following the basic wage rise of £1 per week in June on top of the substantially higher margins for skill awarded in 1963, and a further round of increases in professional salaries is apparent. While some increase in general wages was no doubt justified on grounds of gains in productivity, in the circumstances of overfull employment at present, higher wages are adding to the cost structure at a time when further scope for improving efficiency is diminishing. The danger of cost inflation today is more real than is evidence of excessive demand. It is to be hoped that every effort will be made to hold down wage costs next year while the effects of recent changes are absorbed. It is particularly important that price stability should not be sacrificed at a time when competitive conditions throughout the world are stepping up and when the demand for greater attention to Australian defence policy will encroach on the pace of economic growth.

While these problems of economic adjustment cannot be treated lightly, they have to.be recognized as difficulties which are always associated to some degree with prosperity. Fortunately for Australia the horizons of our known resources continue to widen. Past exploration and survey of the continent is yielding a rich reward of discoveries of mineral wealth, and the application of scientific research and improved management standards is extending the frontiers of primary production as well as developing better utilization of settled areas. Emphasis in the past year has been laid on the spectacular and promis-

ing finds of oil and natural gas which offer new sources of fuel and power for our growing industrial structure. These developments and discoveries imply difficult structural changes within the economy and constitute a bold challenge to the enterprise of existing management both in government and in business. Within this context of growing potential for long-term development and the need to retain an even keel in the short term, the Government has to perform a somewhat uncomfortable balancing act. A substantial part of public expenditures in recent years was designed to lessen the severity of the recession and to revitalize the private sector. Though its programs must be of a continuing nature, the Government’s task in present circumstances of full or overfull employment is to relax the pressure of expansionary elements. Thus the budgetary intentions of producing a mildly restraining effect were appropriate to the situation. In practice, however, fulfilment of election pledges has necessitated increasing expenditure on many counts and therefore reduced the capacity for maneouvre. Greater defence preparation must be regarded as an over-riding consideration, and some delay and slowing down of growth in the sense of material welfare has to be accepted for the sake of security and greater preparedness. Monetary Policy Recent fiscal action to curb the incipient boom has been more a reversal of earlier relief measures than an active restraint, and the Government turned to monetary policy for its main attack. Thus in the course of the past year there has been a distinct change of direction in official policy though not of a drastic degree. The difficulty of this approach, as we have constantly urged, is that for the most part the monetary instruments used are largely ineffective over a growing and important sector of the structure. Nonbank financial institutions and the big companies which can operate in the capital markets are left largely unaffected. It is mainly because of this discriminatory effect of monetary policy on the banking system that we have argued vigorously and consistently for a willing acceptance of flexible interest rates to spread the load of policy more evenly over the whole system. The situation confronting the banking system and the monetary authorities has been the substantial increase in the liquidity of the economy in the past three years arising from higher govemmentexpenditures, substantial capital inflow, and a rapid rise in export incomes. In the course of this year, however, the central bank has taken steps to curb the liquidity of the monetary system. Its open market operations, by the sale of bonds, contributed to increased yields on government securities and to the rise in interest rates generally, but the other measures were designed primarily to affect the banks. Thus it was a year of fresh calls to statutory reserve deposits. The ratio of total deposits frozen was increased five points to 15.8%; and the central bank has imposed a ceiling to the monthly amount of new lending commitments approved by the trading banks. The latter measure is intended to reduce the rate of increase in available credit, but it does not necessarily mean that total advances outstanding Will decline, for it is expected that existing limits will be drawn on to a greater extent in the coming months. No addition to total spending power will result, however, if inter-company lending correspondingly falls. It would be.fair to say that on this occasion the authorities have acted in a timely fashion to try to safeguard monetary stability and to sound a warning against development of a boom through the financial system. But it is evident again that monetary policies of restraint fall disproportionately on the banking system. The growth of the non-banking financial institutions has narrowed the area over which the central bank has control, and every fresh measure lof restriction over the banks

offers a further stimulus to an expansion outside the banking system.

Banking Developments

Against the recent background of greater economic activity, the banks have increased their business in the past year, and in the twelve months to October 1964 deposits of the major trading banks rose 13.3 %. The interesting feature of this expansion was the continuing growth in fixed deposits, amounting to over half of the increase. The banks are now in an improved position to compete with other institutions for fixed deposits as a result of a rise of i% in permitted interest rates and a widening of the terms for which they may be accepted. A new short term of 30 days to three months was instituted for deposits of £50,000 or more and the maximum term for fixed deposits was raised from 15 months to two years. These moves have sharpened competition for surplus funds in the face of the growing consciousness of interest rate disparities on the part of company finance controllers. It must be recognized, however, that for the banks the effort to increase deposits bears not only the direct cost of interest payments, but also the indirect cost of having a substantial proportion of them called into statutory reserve deposits yielding only the nominal return of per annum.

On the lending side, bank loans and advances rose by 9.6% in the year to October. Over one-third of the rise was in the special term loans, which doubled in that period. In line with other changes in interest rates, the maximum overdraft rate permitted was raised from 6J% to 7% last April. The renewed official call for credit restraint again drew attention to the amount of undrawn credit available within existing limit arrangements. The inflationary dangers inherent in this amount are usually exaggerated in public discussion. The greater use of fixed term lending is sometimes thought to provide an answer to this problem, but in the case of the fixed loan, in addition to the increased cost to the borrower, the uncertainty is merely, transferred from advances to the side of deposits. Nevertheless, it is true to say that bank lending today is taking on different forms, tailored more to individual requirements than the overdraft. But apart from the latter consideration, highly competitive conditions in the various financial markets, together with the need to meet control requirements and to maintain and increase earning power, have intensified the necessity for the banks to pay careful attention to the management of their funds in general and to the rollover of their loans in particular. The special term loan fund introduced in 1962 to provide development finance for medium periods was increased again and now totals almost £loom., most of which is committed. A further step taken this year by the banks collectively with the support of the Reserve Bank was the formation of the Australian Banks’ Export Re-Finance Corporation Limited to assist the finance of exports on extended credit terms up to five years. The individual banks will be able to enter into arrangements with their customers for longer-term export loans with the knowledge that in need they will be able to re-finance their transactions with the Corporation. This new facility should greatly help to put exporters on a parallel footing with their competitors in other countries. Savings Banking Meanwhile, amid the discussions surrounding banking and monetary policy, the savings banks provide the most solid growth element in the financial system. In the year to the end of September savings bank deposits rose 12% following a similar increase in the year before. The importance of this steady expansion. apart from the significance of the savings banks’ encouragement of the savings habit, is the outstanding contribution they are making to the finance of housing as well as the support they are giving to public

loan programs. Their housing loans at the end of September were £525m., a rise of more than £loom. in a year, and provide a hard and relatively stable core to a policy which the Government regards as basic. New Zealand Very satisfactory export returns provided solid support for unusually high business activity in New Zealand during the year, and expanding productive capacity emphasized continued policies of growth. As the period drew to a close, however, it became apparent that measures designed to relieve pressure on consumer supplies were proving inadequate. A general wage order was the signal for price increases which now offer the most serious threat of inflation in New Zealand for a decade. The Government has indicated its awareness of the dangers, but has adhered to its policy of avoiding any increase in taxation as a means of restraining consumer demand. Instead it has taken action to reduce the volume of money by funding part of its debt to the Reserve Bank by means of a special loan issue; it intends to ease the demand for resources by deferring its own capital works spending and requesting similar action from local authorities; and it has made provision to meet any excess demand remaining by authorizing an additional £2sm. licensed imports for the year to June 1965. It also announced its intention to maintain firm restraint on trading bank lending, and has asked the newly formed savings banks to defer lending to the private sector until the new year. It will be surprising, however, if these measures prove sufficient to counter current cost and price trends in an atmosphere of growing industrial unrest. After a year when the banks have been able to keep pace with the expansion of the economy, another bout of restrictions would be disappointing, even if lending could be further reduced without causing disruption. It is clear that the banks cannot continue to meet their customers' essential needs if they are also to bear the main burden of enforcing the Government's economic policy. In the year now ended, deposits and advances of the trading banks rose by almost 9 %. Advances were under heavy pressure from March to June following the achievement of an internal cash surplus by the Government in its accounts for the year to March 1964, but came within the ceiling officially sought in July, and have been relatively static since. Two major legislative developments which will have farreaching effects on banking in New Zealand took place during the year. The first provided for the operation in the Dominion of savings bank subsidiaries of the trading banks. Even though highly restrictive conditions have been laid down, the new savings banks achieved a most satisfactory start, raisingdeposits of £lom. in the first month of operation. The second was the introduction of a bill which considerably broadens the powers of the Reserve Bank in relation to the trading banks, and also gives it power to maintain a watch over the banking activities of other financial institutions. This extension of powers may provide a broader and more equitable control of economic activity in the private sector, but New Zealand requires less rather then more controls if enterprise is to be encouraged to contribute to national development. The months ahead will not be easy for New Zealand. But, if the threat of inflation can be averted, external market prospects could help to consolidate the real progress made in recent years.