P.M. issues warning on interest rates

Press, 10 November 1981, Page 1

P.M. issues warning on interest rates

PA Dargaville The Government has prepared emergency regulations to prevent interest rates from rising.

..The Prime Minister (Mr Muldoon) said yesterday that regulations to' restrict interest rates had been drafted last week by the Treasury and the Reserve Bank, and could be introduced overnight. He revealed the existence of-the draft regulations at a lunch-time meeting, when he pledged that interest rates wduld not rise further.

At the meeting he gave no details of the regulations because he “did not want to scare anybody.” But Mr Muldoon told the audience of about 600 in the Dargaville Town Hall that it would take less than 24 hours to bring in the regulations. After the meeting he declined to add to his comments and would, give no hint of what the regulations con-, tained. But the move to have the regulations standing by comes after several weeks of threats by Mr Muldoon to the financial community. He has repeatedly said he would try to persuade financial institutions to hold interest rates down, and has warned that if persuasion was not enough, there were other measures he could take.

Yesterday he expounded what he called “Muldoon’s Law,” saying that he did not agree interest rates should always be higher than the rate of inflation.

“There is no immutable law that says that the rate of interest must always be higher than the rate of inflation,” he said. Mr Muldoon also defended the Government’s recently revised inflation-proof bonds issue, saying the bonds would stimulate savings. The new terms would bring in money “in a gentle way,” but the real reason was to increase savings.

Earlier, he had said that the energy portion of the National Party’s growth strategy would require internal investment of about 0.6 per cent of gross domestic product. “I want that 0.6 per cent of G.D.P. by way of, extra savings ... or the Government’s share of it ... I want that for the domestic portion of the energy section of the growth strategy,” he said. Later, Mr Muldoon said the regulations were not an attempt to force interest rates down more quickly. “They have come down somewhat. I would like to see them come down a little more, but it is a gradual

process,” he said. “What I would not like to see is interest rates go up. I am watching it from week to week.”. Mr Muldoon denied he was using the existence of the regulations to scare the finance houses. “They know my views. They are simply reinforcing the comments that I have made to all the various groups in the financial sector privately,” he said. One of New Zealand’s top financiers, Mr Frank Renouf, a Wellington sharebroker, has called the threat to introduce the regulations nonsensical. “You cannot lower the rate of interest if Government spending continues to rise,” he said last evening. “You cannot lower interest rates if the rate of inflation continues to rise. It is as nonsensical as most of the comments made on this subject recently.” Mr Renouf said that it was time the Government moved out of the market-place and allowed free enterprise in. Imposition of legislation to force finance houses’ rates down was dictatorial. “It sounds‘ like a case of Muldoonomics . . . you cannot do it. There will be no incentive to save.”

The • president of the Finance Houses’ Association, Mr T. W. Fitzgerald, said that before the 11 members of the association took action to lower rates it had been made clear to the association through intermediaries that the Government would have regulations in some form to control interest rates.

He said he presumed that the regulations would be intended to have an effect on those companies who did not take notice of the Government’s wishes. All 11 companies w’ho were members of the association had lowered their rates and they represented, the bulk of New Zealand’s finance houses.

Mr Fitzgerald said that if lower interest rates were going to have any effect on the rate of inflation the effect should show in the first statistical quarter after the fall in rates. The Bankers’ Association considered the Government’s action a warning to speculators that it would clamp down if interest rates rose, said the chairman of the assocation, Mr R. Humphrys. He said interest rates had dropped from 16 per cent two months ago to about 14.5 per cent.

“That drop was partly in response to Mr Muldoon’s call for lower rates and partly an expected seasonal lowering. “We (the bankers) have had no indication since, that our rates are other than acceptable. “The pre-election market,, though, is a speculative one. It is only short-term lending at the moment,” said Mr Humphrys. “The whole investor scene is waiting to see what happens, and we see this, announcement as a firm indication that the Prime Minister wants lending clamped down.” Other senior bankers and financiers in Wellington, although declining to be named, said that they believed the Government’s move would force further investment cash into Government inflation-proof bonds. Under the stated “Muldoon Law” that interest rates should not always be higher than inflation, investors faced with having to pay tax on interest received from money lent out, of deposited, at interest rates not matching the rate of inflation could find their options to protect capital from inflation curtailed severely.

Should the regulations be implemented they believed there would be a big shortage of investment capital for private development. Within National Party political ranks suggestions were made that this further evidence of Mr Muldoon’s willingness to use the power of the State to curb free enterprise would not rebound in his personal favour should the Government suffer defeat in this month’s General Election.

The Leader of the Opposition (Mr Rowling) said Mr Muldoon had taken action 10 days ago which had increased interest rates.

“He is a humbug. He says one thing to the financiers and does precisely the opposite. That is why interest rates have risen year after year.” Mr Rowling said that National was the party which said it was for private enterprise, but it favoured privileged enterprise. He said that Labour would introduce legislation on monopolies, and at the moment the “big fellows come in and swallow the tiddlers up one by one, and the more they swallow the bigger becomes their appetite and the people pay.”