THE PRESS THURSDAY, NOVEMBER 10, 1983. Lower interest rates by law

Press, 10 November 1983, Page 20

THE PRESS THURSDAY, NOVEMBER 10, 1983. Lower interest rates by law

The Prime Minister, Mr Muldoon, has been warning since August 4 that unless the private sector lowered interest rates he would introduce regulations to control them. Some interest rates came down substantially, led by those charged by Government institutions; but the movement has not been enough to satisfy the Government. Now regulations have been passed setting first mortgage interest rates at a maximum rate of 11 per cent and second and other mortgage rates at a maximum of 14 per cent. The days of persuasionare over and restraint of mortgage interest rates has been applied by regulations. It could be argued that the policy of trying to bring down interest rates by persuasion has failed.. The Government has been prompted to act by the result of a survey conducted by the Law Society on rates for mortgages being charged by solicitors. Mr Muldoon became convinced that some lending institutions were waiting for the Government to act on interest rates. He has apparently decided to let them wait no longer. Some of the lending institutions were clearly influenced by the threat of regulations as a means to bring interest rates down. The threat can no longer be held over them, although maximum rates could still be varied by regulation. Mr Muldoon had a point in arguing that, because the rate of inflation is down to about 5 per cent, interest rates of up to 16 per cent were too high. The reason that rates stayed high was partly that many institutions had borrowed money from the public at high interest rates and did not want to lend it at rates which were lower than those at which they had borrowed. Rates remained high also because, although the inflation rate has fallen substantially from a year ago, there is widespread doubt that inflation will remain under control. Financial institutions have been reluctant to get caught by lending money, long-term, at low rates when inflation might erode or destroy the true return on the money lent. One of the problems that all governments have to deal with at present is the expectation of inflation. Mr Muldoon has not only attempted to disabuse the public, in his speeches, of the notion that inflation will continue, but he has now ensured that, in lending money on mortgages, people will have to act in the belief that inflation will remain under control indefinitely. The imposition of a ceiling on mortgage interest rates is added to other controls on the economy. The incomes and price freeze has been applied since June, 1982. Although there may be some adjustment to wages through a

General Wage Order some time next year, and the controls on prices may be eased, the controls will seem to have lasted a long time. Rents are also expected to remain under a degree of control. If wages are controlled so, too, should prices and rents be controlled. It has been a long experiment and perhaps Mr Muldoon will prove that inflation can be controlled by legislation and regulation. He is helped in his experiments by there being few controls on the executive and legislative action of a Government in New Zealand. Lower mortgage rates will be attractive to many potential purchasers of properties. The setting of a ceiling on interest rates will not necessarily make it easier for people to buy houses, business premises, and farms. It seems highly likely that there will be less money available for such mortgages. Those who charge 11 per cent for a mortgage will have to borrow at less than that and investors may find other avenues for their money. Some institutions may go out of the mortgage market altogether. The spirit of the regulations may be challenged by lenders who offer only a small proportion of the money needed to buy a house on first mortgage and who offer the remainder on second mortgage at the higher interest rate. If there is a shortage of mortgage money, this might restrain increases in the prices of houses. Otherwise, demand for houses would increase if money can be borrowed more cheaply. If investors take their money out of mortgage finance, where will they put it? The sharemarket is likely to become a more attractive avenue of investment. Some people may decide to save less and buy more, giving a boost to consumer demand. Mortgage rates have long been a politically sensitive issue and doubtless this played a part in the Government’s decision to control them. The Government also wants to bring interest rates down so that when the State borrows to finance its own spending, it will not need to pay so much interest itself. If some of the predictions about a black market in mortgage finance are fulfilled, it will become increasingly difficult to legislate against all the possibilities. A burst of confidence in the economy and a belief that inflation will not increase again, would do much to remove the necessity for the regulations on mortgage interest rates. The more the economy is controlled, however, the less reason the community has to belief that inflation can be restrained without intervention.