Drastic Govt move will affect money market

Press, 31 October 1981, Page 1

Drastic Govt move will affect money market

A drastic change in monetary policy was announced by the Prime Minister, Mr Muldoon, last evening.

A series of new measures, which is likely to have major ramifications in the money markets, aims at raising money from the public to mop up liquidity and to help close the large gap between Government income and spending. Instead of trying to “talk" interest rates down — as he has in the past few months, Mr Muldoon is now putting pressure on the financial markets by an active policy of raising money from the public. Mr Muldoon said that the Government had approved the issue of premium stock which would attract a coupon rate of 12 per cent a year. It would also offer a premium rate of 4 per cent after two years and 10 per cent after four years.

This means that a person holding the stock would earn an interest rate of 13.8 per cent over two years and 14.9 per cent over four years.

Mr Muldoon said that the Government had also decided to make some changes to inflation-adjusted savings bonds.

Mr Muldoon said that the stock would mature four years after the date of investment. Early redemption would be available on two weeks notice after four weeks from the date of application. A maximum holding of $250,000 of the stock would be allowed. The premiums would be taxable.

• The present limit of $5OOO on annual subscriptions would be eliminated and. the early-redemption facilities would be extended to all bond holders, subject to no inflation premium being paid unless the bonds being redeemed were held by people aged more than 60, or people purchasing a first home, a farm, or a fishing vessel. The maximum investment of $lO,OOO would be increased to $20,000. The early redemption would be available on a new series to be issued soon. The Government had also decided to raise the prize funds for bonus bonds from its present 6 per cent to 8 per cent. Mr Muldoon said. "These measures have been taken by the Government after a careful . consideration of the monetary pressures which have become evident in the economy. The sale of premium stock should ease monetary pressures by reducing the reserves of financial institutions and this should help restrain privatesector credit expansion.”

The new premium issue does not carry an unusually high interest rate and is pitched a little below rates offered by other leaders. But the rate is competitive. The issue offers a cash incentive for people to leave their money on deposit.

The Leader of the Opposition (Mr Rowling) said that the Government was in big trouble and its new monetary measures were evidence of that. The issue of premium stock would raise interest rates.

Mr Rowling said, “The Government policy is a clear indication by the Government that it has abandoned any real effort to reduce interest rates in the New Zealand money market. Mr Muldoon is making -a desperate bid to drag in enough money to reduce the huge deficit the Budget has shown."

■ A Wellington sharebroker, Mr John Benton, said that the new measures were "punitive and unrealistic.” The issue of premium stock would not attract the man in the street and it was obvious that the inflation-proof bonds were the real enticement.;