P.M. threatens tighter squeeze on credit

Press, 14 April 1984, Page 1

P.M. threatens tighter squeeze on credit

By

MICHAEL HANNAH,

Parliamentary reporter

An even tighter hold on credit is being considered by the Prime Minister, Sir Robert Muidoon, to counter signs that demand for loan finance is still growing.

Sir Robert says he is still prepared to introduce “damaging” regulations against financial institutions to achieve a tighter credit supply.

He also disputes a view held by trading banks and finance houses that continued restraints beyond June will damage an economic recovery.

“I do not accept that. There has got to be a tight hold on money and credit, rather tighter than there is at the moment in my view,” he told “The Press” yesterday. Credit controls imposed in March and April have succeeded in reducing the growth in lending and overdrafts. Institutions approached by “The Press” in the last two weeks say they have reviewed their lending policies and brought their growth to within the Government’s guideline of 1 per cent growth a month. Sir Robert agreed that credit growth was “coming back to their guidelines.” The Government forced trading banks and finance houses to invest more of their funds in Government stock in March and April,

thus reducing the amount of money institutions had available to lend to their customers. The Government stock requirements also cost trading banks a penalty of at least $1.5 million, as they had to rely heavily on the Reserve Bank to meet their requirements. However, Sir Robert says the hold on credit is “still not entirely satisfactory.” “There is considerable evidence of demand'increasing and a shortage of stocks, and that means greater activity and more demand for credit. That has to be restrained and it is going to be restrained,” he said. He dismissed claims by some institutions that continued restraints beyond June would damage an economic recovery. Banks particularly felt that the next 2¥z months were “crucial” for them. They felt that they could restrain lending and deposit interest rates for so long, but any longer and they stood to lose too big a share of the money market. They saw this market going to finance houses, which have already eaten into the trading banks’ market share, reducing it from

51 per cent to 48 per cent recently.

Although all trading banks have shares in finance companies, it was argued that the higher cost of money from finance houses would dampen an economic recovery. Sir Robert said he did not accept this, and accused the institutions of giving a prognosis that best suited their interests. “I have got to give you an analysis from the point of view of the public,” he said. Sir Robert’s view that credit should be even tighter matches advice he has received from the Reserve Bank. In its latest monthly bulletin, the bank suggested the Government retain a tight hold on credit and money supplies. (Report, page 26). The institutions also maintained that the Government’s hold on their funds could jeopardise their agreement to hold interest rates on deposits, down to 10 per cent for trading banks and 11 per cent for finance houses. They say they have had to compete more fiercely for deposits in order to meet

both the Government stock requirements and their own lending commitments. This has put pressure on deposit rates, they say, and even more pressure is expected if the Government reintroduces a Kiwi-type stock to help finance its deficit. Sir Robert admitted the Government was discussing a new retail instrument, though it had not made any decisions yet. However, he foresaw no difficulty in setting it at a market rate of interest, because, he said, “We are going to take steps to see that the market level is such that that happens. “But if the market does not respond to statements emanating from the Government, then regulations will emanate from the Government which will ensure that they do comply. But they will be damaged in the process. “The kind of regulations I am looking at at the moment — I have not made any decisions — will in fact damage the financial institutions if they are applied. There is no alternative,” Sir Robert said.

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