’Appropriate to reduce interest rates now'

Press, 13 April 1978, Page 2

’Appropriate to reduce interest rates now'

“It would be quite appropriate to reduce interest rates now to encourage some consumer spending.” the governor of the Reserve Bank (Mr R. W. White) told the Canterbury branch of the Economic Society of Australia and New Zealand. The Reserve Bank would rather see this come about naturallv through the private sector than through Government monetary policy, said Mr White. He said, however, that to •void an excess of consumer spending, as happened in 1973-74, a reduction in interest rates would be better achieved at a time when credit reserves were lower than they were now. Mr White was answering a Question on whether the Government would intervene in the monetary supply to reduce interest rates, and encourage consumer spending. Mr White in his address posed the question: “Should New Zealand adopt a publidv announced monetary -policy?"

“Tn the Reserve Bank, we first began thinking about Jhe desirability of establishing a monetary guideline on purely pragmatic grounds, for the present system leaves much to be desired as a means of letting financial institutions and others know w-hat the authorities would like them to do.” he said. “A change in the reserve ratio requirements may signal the direction in which we would like monetary conditions to mova. but it does not tell a financial institution the degree of change we w-ould like to see." Mr White said. • "Neither does the present

method of guidance make sufficient allowance for the time which elapses between an adverse change in monetary conditions, recognition ot the need for a change of direction or emphasis in monetary policy, and the Impact of the policy changes when made on deposit and lending policies. “There is always a danger that monetary conditions will have changed for reasons independent of policy by the time the impact of policy decisions is felt. Whether the policy impact will then be right or wrong, is in the lap of the gods.” said Mr White. “The best way of mitigating these lags is to establish a guideline in terms of the desirable level of a monetary aggregate in the future.

If the criteria used in determining the guideline are well understood and accepted bv the financial institutions there is much more chance that monetary conditions will finish up in accord with what is desirable than at present.”

The need for intervention by the Reserve Bank should be less, and recognition lags should be reduced, he said. The control of inflation in New Zealand was a community responsibility, not just to be handed over to the Government.

It was hoped it would follow. from the assurance the public would have, that money would not continue to be a source of instability in itself. “If instability arises from other sources, such as excessive wage increases, credit would not be expanded to accommodate it under such a monetary guideline,” Mr White said.