Bank critical

Press, 25 August 1981, Page 18

Bank critical

By AAP finance editor Roy Harbour, through NZPA

Tlhe Reserve Bank, of Australa is none too happy with the-way the Australian Goverrin»ent managed, the economy in the last financial year, but according to the treasurer (Mr Howard) there ate more than just monetary considerations' to be; taken into account when framing economic policy. The political factors have to,<be considered as well, he', de-olpred before an audience of businessmen, who greeted the news with ironic ap-

than very short Government 'paper.-: : ;r - "There appeared to be concern that a need for tighter policy and strong competition for funds would lead to rises in interest rates," it said. "This assessment was strengthened by rising interest fates in the United States. “the imminence of a Federal election date in 1980 increased the uncertainty. Many observers expected a • rise in official sellins vields

plause. And speaking to reporters later, the treasurer would give ho assurance that the advice of the-bank was more likety to . be followed this year than last, although the political considerations" will not include an. election, The Reserve Bank’s unusually frank criticism of Government monetary policy in 1981-81 was contained in the annual report' tabled in Parliament. ■ It said that the Government failed in its objective of restricting money supply gpowth for the third successive year because, the Government failed to react quickly enough to- market forces. The report says that in August last year, when liquidity had tightened and bond sales dwindled, there was increasing market nervousness. and ah unwillingness to buv anything other

after the election." Weakness in the bond market was increasingly being seen as linked to rigidity in officially-controlled interest rates in the banking, sector, and there was a growing conviction that official ceilings would have to rise, the report says. ‘The bank has accepted the case? for deregulation 'of banking interest rates, and sought during this period to, provide banks with more flexibility in this respect. For a considerable time, it did not succeed in obtaining the necessary Governmental concurrence with such.action. “The bank approached the Government in August, September, and again in early. November, but it was not until December that agreement was reached on a package of policy action." Under: the heading “Comments on policy" the report said:

“Sales . of Government bonds during the year did not match the task of restraining monetary growth. An important factor was the lack of flexibility in official bond yields.

“Delays in moving yields on primary issues of bonds in response to changing market conditions kept official yields, for lengthy periods, below the levels that, the market was willing to accept. ■ *

“Growth in money and credit in 1980-81 was too rapid, even taking into account that growth in- output was stronger than expected.

. “It. appears monetary policy has been unduly accommodating to inflationary pressures." The bank said bluntly that "experience in the last three years had demonstrated the way policy has been implemented." The expansions, of the firsthalf of .the. year have not been adequately, reversed later.

“In the process, there has been upward pressure on interest rates and on the usage rate of overdrafts: borrowing from abroad has also been encouraged. ... “If the rate of growth in money and credit is to be smoothly and firmly restrained to desired levels in coming years,, it is essential that the instruments of monetary policy be used with a flexibility that will allow much quicker response than in the past to changed market conditions,” the bank concluded. Mr. Howard admitted that Government policy had not been as successful in containing the growth of the money supply as it had been in limiting inflation in terms of formal targets. (The money supply last grew 12.7 per' cent, well, outside the target range of 9 to 11 per cent.)

However, he said, the worst that the Government could be accused of in the wake of last year's stalling on bond rates was not wanting to see interest rates going up any earlier than necessary. - !

,- “I don't think our fight against inflation was jeopardised," he said.’ “The bank would like to see even tighter controls oh money, but: Th.e:. Government, is -not only concerned with economic. and monetary considerations. There are political considerations as well.

“As far. as the Government is concerned,' the Reserve Bank has the vehicle of its annual report to make its views known.

“I don’t believe that if you look at our inflation performance last year we did too badly.”