Government again tightens credit

Press, 29 February 1984, Page 29

Government again tightens credit

By

MICHAEL HANNAH,

Parliamentary reporter

The Government has moved for the second time in a month to restrict credit growth and attract money to Government coffers. The latest moves, announced in the last two days by the Acting Minister of Finance, Mr Falloon, could push up short-term interest rates, though fall short of another interest rate battle with private institutions. Moves announced by Mr Falloon will mean: ® A rise in trading-bank reserve-asset ratios from the present 29.5 per cent to 32 per cent in March. © A cut in the trading banks' free reserves margin from zero to minus $5O million. ® An attempt to attract more money to inflation-

adjusted savings bonds. According to the Reserve Bank, the moves are consistent with the stated aims of the Minister of Finance,. Sir Robert Muldoon, of reducing interest rates and resticting credit growwth at the same time. However, they come barely three weeks after the Government withdrew its second Kiwi Savings Stock issue from the market to help private institutions “find their feet” in lowering their interest rates. Private institutions have not had to compete with a relatively high Government stock rate — 10 per cent on the KiSS issue — to raise funds, and interest rates have therefore been allowed to fall somewhat.

The latest move to raise the reserve asset ratios and cut the free-reserves margin, to a negative figure for the first time, will require trading banks to find even more funds to place in Government stock, at a time when their funds are tied up with annual tax payments. According to the Reserve Bank’s chief economist, Mr P. W. E. Nicholl, this could put pressure on trading banks to find the money elsewhere, say on the wholesale TCD market, consequently pushing up shortterm interest rates. As the move is intended as only a short-term action, however, it is unlikely to flow through

to retail interest rates, such as those offered on term deposits to smaller savers. Trading banks are already required to place 29.5 per cent of their funds in Government stock. The latest rise is based on a negative free reserves margin of minus SSOM. Two cuts in the freereserves margin have been announced in the last month. The latest will make it more likely that banks will either have to borrow, at penal rates, from the Reserve Bank to cover credit they extend to customers, or to restrict their credit growth even further. Mr Falloon said the pro-

gressive tightening in policy was aimed at slowing bank lending growth to the 1 per cent guideline established last April. In the four months to January, 1984, the rate of growth in banks’ lending has averaged around 2 per cent a month, and preliminary figures suggest a rise of between 2 and 3 per cent is likely in February. “The Government has made it clear that we do not intend to allow private sector credit expansion to put in jeopardy the current low rate of inflation,” Mr Falloon said. Ratio measures had been taken against trading banks three times, twice against finance

companies and once against building societies in recent months, and Mr Falloon said the message should now be clear. “The Government will continue with this strong ratio policy until such time as the lending growth rates of financial institutions are moderated substantially," he said. The inflation-adjusted bonds had been enhenced by three moves, Mr Falloon said. The major change would remove the limit of $20,000 which an individual might hold in bonds. An individual might now invest any amount, with a minimum of $lOO for each investment and multiples of $5O thereafter. The other two changes

will make the inflation premium payable on the bonds calculated to the date of redemption. At present, the premium is payable up to one month before redemption. And a minimum inflation adjustment of 1.25 per cent in every quarter will apply from the quarter ending March 31, 1984. Previously, while there was a minimum premium of 5 per cent per year, returns could be lower during low index periods, as the 5 per cent was compounded quarterly. The enhancements would apply to all inflation adjusted bonds, including those currently held, Mr Falloon said. A new prospectus would be issued by the Reserve Bank on March 1.