P.M. warns finance companies again

Press, 5 August 1981, Page 24

P.M. warns finance companies again

PA Wellington Mr Muldoon gave another warning to finance companies last night to take care that their lending and interest rate policies fitted in with Government economic policies. At the opening of the General Finance new head office building in Wellington, he said it was essential that the Government’s economic strategy should not be undermined by any resurgence of inflation. “This Government will act strongly to counter any developments which may hinder progress towards a stronger and better econ-, omy,” he said. He congratulated General Finance for being responsive to Government policy, as it had been one of the companies to reduce interest rates over the last few months. Mr Muldoon said in recent years there had been considerable rationalisation within the finance sector. He believed this was a healthy trend, as it implied a stronger degree of competition within the industry.

One advantage of this was that, it enabled the Government to play an effective part in monitoring and modifying financial flows where necessary through monetary policy. “For a wide variety of reasons the process of finan-

cial intermediation needs to be carefully watched." This was in large part because of the significant role that financial intermediaries have in the money creation and supply process.

The behaviour of the money supply was an important determinant of economic conditions, including the rate of inflation, and it had a strong influence on the balance of payments and on investment decisions.

A difficulty was that many people did not appear to be sufficiently aware of the seriousness and pervasiveness of the harmful effects of continuing long-term inflation.

“Inflation must be contained, and those who advocate policies which ignore this necessity are demonstrating their lack of understanding of the seriousness of the problem. “It is generally agreed that restriction of the rate of growth of the money supply will, with a time lag, bring down the rate of inflation.

“But overseas experience showed that a rapid slowdown in the growth rate of the money supply may, in the short term, cause a severe contraction in output and employment, . while prices respond morel slowly. “Only in the longer term, as people come to - realise that prices are not being

supported by monetary expansions. will inflation’start to fall.

“In the intervening period the extent of the fall in output and rise in unemployment will largely depend on the ease with which resources can be transferred to new activities.

“In turn, this requires that the economy should adapt flexibly to the changes required. “If distortions and artifical restrictions in the economy prevent such a flexible transfer of resources, monetary tightness and its consequent upward pressure on interest rates can result in an excessive slowdown in the economy and an increase in unemployment," he said.

The Government had been concerned to contain but steadily reduce monetary expansion — and thus inflation — rather than squeeze it, while introducing policies that encourage the flexible movement of resources into efficient industries. “This Government will take the steps necessary to contain inflation while, at the same time, adopting policies to smooth the transition to the expected growth phase. “As a stronger, more competitive economy develops, there will be more room for the active use of monetary and other policies to contain inflation,” Mr Muldoon said.