Realistic interest rates Govt’s main goal

Press, 16 February 1978, Page 2

Realistic interest rates Govt’s main goal

More realistic interest, rates on borrowed money, including house mortgages, are the main goal of Government economic measures.

The Prime Minister (Mr Muldoon) made this clear in Christchurch yesterday when he outlined to the annual .cjnference of the Associated Trustees Savings Banks some of the policies the Government will bring to

Mr Muldoon predicted a [Steady increase in the demand for credit during this year as the economy reacted |to the stimulus of moves isuch as the 5 per cent cut in ’ personal income tax, addiI tional Government works, [reductions in the reserve requirements of savings banks land life ins rance offices, I the easing of hire-purchase I regulations, the phasing out of the import deposit scheme, and release of the woo l-retention account money.

“These trends in the supply and demand for funds have an obvious implication for interest rates in 1978,” Mr Muldoon said. ‘lnterest rates will fall.

“This tendency will be reinforced by the reduction in the rate of inflation that I believe will occur this year ta the absence f some factor not yet apparent; and the Reserve Bank will also [operate in the market to some extent to offset any upward pressures,” he said.

] “There is no doubt that interest rates which a-e !arbitrarily fixed well belt.. jtbe rates of inflation are an (engine of inflation. They discourage saving and encourage spending,” Mr Muldoon | said. The Government would allow interest rates to be set in the market place, but would influence them from time to time by such tools | as the rates set on Govern|ment securities and through the recently established open-market dealings of the Reserve Bank. “Also we will continue to ensure that housing finance is available to those on limited means on better terms than those on the i “With interest rates falling this year, institutions which continue to pay very high rates of interest on deposits and debentures may find themselves in a profit squeeze. They will have increasing difficulty ir being fable to invest these funds [profitably. j “I woul_ advise financial I institutions to look ahead (when setting interest rates for term deposits. I suggest

ithat they help the adjust- | ment to a lower level of [interest rather than try to (hinder it by holding up the interest rate structure to {protect their cvn mistaken ! decisions.

“If they do not, they have only themselves to blame if I they get caught,” said Mr i Muldoon. Government assistance [will be given for the first I time this year to deal specifically with the surges [in interest rates that can occur because of the uncertainty and instability caused by the large tax flows to the Government, particularly in March. This March the Reserve Bank will run a system of compensatory deposits with the trading banks. In essence, the scheme will spread the impact of the tax flow to the Government evenly -.Tver a period of about two months and a half whereas in the past the impact has been concentrated haphazardly within some two weeks. “This scheme will mean that trading banks, and [ other financial institutions [as well, should be able to take a long-term view in setting their interest rates, rather than be obsessed by the short-term goal of having sufficient funds to see themselves through the tax period,” said Mr Muldoon.

If the scheme succeeds, it will be extended to September tax flow periods as well.

Mr Muldoon outlined further easing in the monetary policy which is intended to ensure that private sector credit continues to grow at a reasonable rate and that the downward trend evident in interest rates is not hampered.

“The Government security ratio applied to finance companies is to be reduced from 15 per cent to 12.5 per cent of their ‘borrowings’. This should release about SISM for investment in the private sector.

“The reserve asset ratio applied to trading banks will be eased correspondingly. The reserve requirement applied to their term deposits will be reduced from 15 per cent to 12.5 per cent from March,” said Mr Muldoon. 1

“At the same time, the margin of trading bank “free reserves” aimed at when ratios are set will be increased from SIOOM to SI2SM. “The limit on lending under the personal loan scheme by trustee savings banks will be raised from 1 per cent of their total depos-

its to 2 per cent. This will raise the limit by about SIIM for trustees savings banks and S7M for private savings banks,” he said. Mr Muldoon said it was Government policy to increase the share of mortgage finance for housing that is provided by private financial institutions.

“The Government is committed to maintaining a reasonable degree of building activity and to fostering conditions which are favourabe to first-home buyers, but there are problems in the quality of housing finance. “We want to see the savings banks, trading banks, and other private sector institutions develop a housing finance market in which first mortgages are available that are for long terms and for a high proportion of the value of the property. At present too many first mortgages are too small and for short terms.

“This means in effect housing finance is being rationed through the secondmortgage market. “For some first-home buyers the weekly outgoings on the second mortgage exceed those on the first mortgage and can be met only from secondary income,” he said.

“The provision of mortgage finance will be kept under constant review dur-

ing 1978, but we do not believe that at the present time the major problem facing the housing market is a shortage of mortgage finance. Certainly it will not be a problem as monetary conditions ease in the coming months. “The two major problems are a fall-off in the demand for houses and the high cost of servicing mortgage finance which prevents some would-be home buyers from taking the crucial first step to home ownership. “The building industry must appreciate that the demand for housing has changed over the last year,” he said.

“In particular, the migration outflow has lifted pressure from the economy and the housing field especially, so that there has been a downturn in demand which has caused problems for the building industry, while at the same time stabilising house and land prices. “The industry needs support and it will get it, but the support must take into account the changed economic circumstances.

“We are also anxious that we do not jeopardise the stability in prices for houses and building sections that has been achieved, and which has removed one -of the major hurdles that firsthome owners have to overcome,” said Mr Muldoon.