INCENTIVES FOR FIXED DEPOSITS

Press, Volume CIV, Issue 30741, 4 May 1965, Page 3

INCENTIVES FOR FIXED DEPOSITS

(N.Z. Press Association) AUCKLAND, May 3.

Measures to restore the attractiveness of fixed trading bank de* posits, not necessarily confined to adjust* ments in interest rates, should be taken without further delay, the general manager of the Bank of New Zealand (Mr J. G. Souness), told the Auckland Rotary Club luncheon today.

This would allow the deposit system to play its full part in monetary management, he said.

By easing the pressure on resources, adjustments would make a substantial contribution to monetary stability—which had so far proved the most elusive of all the objectives of the welfare society. Mr Souness, who is also chairman of the New Zea-

land Bankers’ Association, said in terms of interest reward, bank fixed deposits had not for many years been a very attractive investment. It was on the deposits rather than the advances side that a more flexible interest rate policy for the banks could be helpful to the economy. The role of fixed bank deposits in New Zealand had steadily declined and they new constituted a mere 14.1 per cent of total deposits, against 44.4 per cent in 1939. Mr Souness said the country had known credit squeezes in one form or another for about 20 years. On the average, advances in the same period were now about four times as great as in 1945, whereas in the same period the national income had increased about seven times. There had not been a time in the last 10 years when the banks had not been turning away some, and sometimes very many, fully credit-worthy customers. The cause of this unprecedented situation was that the

country was maintaining, mainly through Government spending policies, a continuous state of excess demand—a seller’s market. In these conditions the aggregate of creditworthiness was very high. Why then not allow bank overdraft rates to find their natural level instead of pegging them at artificially low levels, it was asked, said Mr Souness. The Monetary and Economic Council had taken this line. There was no doubt a raising of interest rates would have some restraining effect, but the question was whether an adequate degree of deterrence could be attained. This would, Mr Souness believed, necessitate rates well above levels which would be tolerated politically or by the public. Rates of that high level would have such an effect on the whole structure of interest rates, and hence on investment, as to loosen some of the underpins of the welfare society itself.

“Freeing of overdraft rates would assist in the quest for stability and a better balance between the demand for and supply of bank credit,” he said. “But I fear there would be irresistible demands to reverse the policy before it had become decisive.” A moderate rise in lending rates would be unlikely to have much direct effect on the banking situation, but there could be some quite useful indirect effects, said Mr Souness. A moderately higher overdraft interest rate structure might not be a significant deterrent to bank borrowing except in the primary industries. It could retard growth in the very sector where the country was looking for expansion. However, there could be considerable value in an upscaling of overdraft rates to reduce their artificial lowness relative to other rates, and appropriate preferential treatment could continue to be given to the export industries.