‘lnduced’ Monetary Controls Urged

Press, Volume CX, Issue 32391, 2 September 1970, Page 18

‘lnduced’ Monetary Controls Urged

Induced controls rather than directed methods should characterise future New Zealand monetary and credit policies, the chairman of the Monetary and Economic Council (Professor F. W. Holmes) suggested in Christchurch last evening.

In an address to members of the Christchurch branch of the Economic Society of Australia and New Zealand, Professor Holmes said that the Government was tending to move away from a “hotpotch” of administrative controls over financial institutions.

have determined the different ratios which have been set up for different institutions,” said Professor Holmes. “While the new system of control should be more conducive than the old to efficiency and flexibility in the allocation of available funds it still has a very arbitrary element in it” he said. “For example what borrowing and lending activities should be in the net and what outside it? What rules should be set for. different institutions?” Direct Methods New Zealand did not seem to have reached the position where the authorities were prepared to start moving away from reliance on direct methods of control towards a greater use of market operation and public debt management to influence the flow of funds. “While I do not want to overpaint the system as run by the Australians they do seem more prepared than Our authorities to accept that if you have an inflationary situation its easier to bring the supply of and demand for finance into equilibrium if the price of finance is raised.” Australian authorities did make more efforts than their New Zealand counterparts to meet the market. Professor Holmes said.

“If restraint is required the authorities must be prepared at least to let interest rates rise and sometimes encourage them to rise—certainly they should keep'out of the game of holding up security prices for those who wish to sell securities to get funds for spending or to keep up their lending to the private sector,” So far New Zealand Governments had been reluctant to accept advice to move more rapidly in this direction in their monetary and credit policies, Professor Holmes said.

This move was towards what he described as perhaps a somewhat more consistent pattern involving less detailed intervention in the institution’s affairs.

, “However, the new controls ate still administrative in character and it is not clear to me just what principles

: If New Zealand’s new polii cies were to work satisfactorily then the key points of Australian policies needed to be noted. “For example, the element of compulsion in investment in Government securities (by banks) should be reduced, and bank interest rates should not be arbitarily held out of line with other competitive rates." Rate Variation Banks should be encouraged

to vary rates according to circumstances, for their lending would be easier to restrain if they could make overdrafts more expensive; and restraint on them was less likely to be frustrated by expansion elsewhere, Professor Holmes said.