THE PRESS SATURDAY, MAY 19, 1984. To lead, not to follow

Press, 19 May 1984, Page 16

THE PRESS SATURDAY, MAY 19, 1984. To lead, not to follow

Confirmation that the Development Finance Corporation will not be allowed to escape the Government’s campaign to reduce interest rates will provide some comfort for other finance houses, banks, and lending institutions such as building societies. The Acting Prime Minister, Mr McLay, said this week that the Government recognises the corporation’s reliance on overseas money for much of its lending power. The corporation, because it is therefore subject to currency fluctuations, is placed somewhat differently from most other finance institutions. This alone is not sufficient excuse to exempt the corporation from the Government’s requirements, Mr McLay said. This is a fair policy. The private finance market - and the electorate at large, for that matter — would object strongly to restraints on interest rates that fettered most borrowers and lenders, but left a publicly owned body such as the corporation to its own devices. Special circumstances would have to be significant and persuasive before an exception could be made. Five complaints of infringements of interest rate regulations against private sector finance houses have been referred to the Crown Law Office by the Reserve Bank. Prosecution of these firms might result. In such circumstances, the policy that gives rise to the possibility of prosecution must be seen to apply equally to all. However painful or disadvantageous an imposed regime may be to some people, it is less objectionable if its imposition is evenhanded.

For these reasons, Mr McLay’s assurance is welcome; but does it go far enough? Is it enough, in other words, for a publicly owned body merely to accord with the Government’s general approach on interest rates? Or should it be in the forefront of that campaign? The Associate Minister of Finance, Mr Falloon, and officers of the corporation are still in discussion

about interest-rate reductions. Mr Falloon has said that the discussions do not include the possible use of Government finance to help the corporation reduce its interest rates. He has allowed that the option is one that could be considered; to date, however, it has not been raised either by the corporation or by himself. The main ingredient of the Government’s campaign on interest rates has been the stick. The advantages of sparing and judicious offerings of carrot should not be overlooked. Both sides of the market must be led to the conclusion that lower interest rates will stick.

The Government might yet be obliged, in any event, to make greater use of the corporation as a tool of economic management. The restraints on interest that can be paid to lenders is limiting the volume of money that is coming forward. Many people with surplus funds are finding the unregulated alternative of the sharemarket more attractive as a form of investment. Fixed-interest investments are being treated increasingly as short-term repositories for money. This is restricting investment in business growth. Even at some risk of increasing the money supply, the Government may be forced to adopt measures that will enable State institutions, such as the Development Finance Corporation, to increase lending to business and to help set the pace for longer-term interest rates. Businesses that need long-term investment need long-term certainty about finance. In the first instance, they must be able to borrow the money. If lending institutions cannot get long-term money from depositors, they cannot be comfortable about long-term lending to business. This is where the State institutions may have to step in to facilitate the economic growth. Here is one of the results of interfering with the market in the first place.