Monetary Control By Interest

Press, Volume CIV, Issue 30822, 6 August 1965, Page 3

Monetary Control By Interest

(Parliamentary Reporter) WELLINGTON, August 5. The Reserve Bank today advocated a more positive policy of using flexible interest rates as a monetary tool. The weakening of monetary policy implied in the more active and efficient use of funds through various “fringe” financial institutions, free to lend without official limit, could thus be remedied, the bank said in its annual report tabled in Parliament. The report recorded “a great reluctance in New Zealand” to make more positive use officially of interest rates as a means of influencing the flows and uses made of funds. “One opinion fc that variable Interest rates would not be effective enough in influencing decisions to save, spend or invest,” the report said. “Another is that they would be far too effective. “The net result is that interest rates move very sluggishly in response to market forces. They move little and seldom when they are subject to official control.” Changes in interest rates probably had little direct effect on consumer spending, said the bank: but they could have a considerable effect on business decisions on whether and when and where to borrow for capital spending.

“Likewise, they affect the market value of existing financial assets and therefore influence decisions to sell those assets. “It is often thought that more flexible interest rates necessarily mean higher rates and higher costs and prices.

“But since higher interest rates are a means of resisting inflation, their use should be to help keep costs and prices down. “Furthermore, flexibility implies movements downward as well as upward to meet changing circumstances.” The bank also suggested that a progressive shift in emphasis from taxes on income —now accounting for twothirds of revenue—to taxes on spending would make an important contribution to increases both in productivity and ih real income.

The report renewed Reserve Bank argument that conventional credit policy must be supplemented by, informally at least, bringing within the purview of monetary policy all institutions which, as a significant part of their business, accept deposits and make loans.

It said legislation last year authorising the bank to seek information from such institions on deposits and lending business and to make “recommendations” to them on policies which should be followed was being implemented. “As a beginning, consultations have been held between the bank and the stock and station agents and the newlyformed Finance Houses’ Association. “Some new statistics are being obtained on the asset structures of life insurance offices and of savings banks and of the transactions of finance companies. “It is planned to extend further the coverage of statistics of financial activities in the economy and to evolve policies which will supplement the appropriate regulation of credit provided by the trading banks.”