SMPs stimulate growth in private sector credit

Press, 29 May 1982, Page 19

SMPs stimulate growth in private sector credit

PA Wellington Supplementary mimimum price payouts 'to farmers could stimulate growth in private sector credit when it is already excessive, and create distortions in the export industry, according to the Reserve Bank.

Examining the monetary implications of the supplements. it says in its latest bulletin that SMPs are high enough to exert a significant impact on monetary conditions in the 1981-2 fiscal year.

“The concerns which may arise from large injections of liquidity through SMP payments with regard to monetary policy, stem from the fact that the addition to the monetary base may stimulate an expansion in private sector credit by the major lending institutions at a time when credit expansion is already excessive." The bank says that in terms of more general policy issues, such payments raised questions concerning the level of support certain sectors of the economy may

receive, or certain groups within a sector.

“Support of this kind, where it is not available to all export industries, carries with it the possibility of introducing distortions into the structure of export industry activity." This was because it wakened the impact of market signals on the recipients of the payments. But the bank said this should be set against the benefits of any increased production because of improved confidence producers experienced. On its own, such an injection of funds should significantly ease liquidity. But the Government had withdrawn funds from the monetary base through its premium stock and inflation-proof bonds investments. "Whether the Government felt that most benefit would be gained from extra liquidity being channelled into the economy in this manner, or in some other way. would also affect its assessment of the payments,” the bank said.