Lean June likely for finance houses

Press, 2 June 1984, Page 8

Lean June likely for finance houses

By

MICHAEL HANNAH

in Wellington Revised estimates of the money supply indicate that June will be a lean month for some financial institutions, as they try to meet stringent investment requirements and compete with new inflation-linked stock. The new estimates, released by the Reserve Bank this week, also confirm the intention of the Prime Minister, Sir Robert Muldoon, to maintain strict control over lending growth at least until the end of August, and possibly until the General Election. The estimates confirm that May had been a tighter month than had been expected, and show what the bank described as “significantly different” estimates of the money supply in June. Instead of a net growth in available cash and savings of $5OO million in May, the money supply fell S29OM. For June, the bank has revised its estimate of extra money available in the economy down from SSOOM to S34OM. The cuts were blamed by the bank on changes in the timing of the Government’s deficit, and higher payments on imports than had been expected a month ago. Payments for imports exceeded export receipts by SBOM in the three months to May, and the overseas deficit is expected to be even bigger — an estimated SS2OM — for the three months to August, indicating a big drain out of the money supply in the next three months. This compares with a gain of S7O7M in overseas transactions in the May quarter last year, and a deficit of SII7M in the August quarter of 1983.

For financial institutions, facing what Sir Robert has promised will be another tight month in June of enforced saving in Government stock, the revised money supply estimates indicate there will be keen competition for funds this month. Normally, the institutions could expect to recoup the heavy cost of attracting funds with high deposit rates by raising lending interest rates. Yet regulations introduced in May prohibit such increases in lending rates. Those institutions, then, with low cash reserves are expected to be under pressure, facing a choice of either carrying the cost of high deposit rates, or of reducing their deposit rates to a level that can be afforded by the regulated lending rates. Either way, some institutions are likely to see their profits drop, as Sir Robert predicted when he imposed the new lending regulations on May 28. The Government has made a concession to the tightness in the money market by reducing the amount of stock that will be put up for tender on June 7. It seeks S2SOM, compared with the S6OOM which it sought in May and which severely drained the money market. At the same time, however, institutions will have to compete for funds with the attractive rates on the inflation-linked tender stock and the new retail stock, the “Our New Zealand Bond.” Sir Robert believes the “Our New Zealand Bond” will have wide appeal as it provides “an excellent combination of quarterly interest, security and availability of capital.” It offers an interest rate of 5 per cent, plus one percentage point for every

one point rise in inflation. If inflation is at Sir Robert's predicted level of 5 or 6 per cent at the end of the year, investors will have a return of 10 or 11 per cent, which will be paid quarterly. Moreover, the investment can be withdrawn after six months. If inflation is higher, as the Labour Party and several economists have predicted, the return will be that much higher, and the success of the tender could be regarded as a gauge of the public’s confidence in the Government’s hold on inflation. The bond issue had been expected for some time, and “The Press” predicted on May 5 that such a bond was likely to be announced in May to absorb what was then expected to be a mounting money supply. Its introduction is believed to have been delayed one or two weeks, because of the miscalculation of the likely money supply in May. The bond may also appeal to big investors, such as companies, as they will be eligible to invest as much as they like in it. Corporate entities and persons over the age of seven years are eligible investors, and there is no maximum on the amount of money which can be invested. Although institutions which must invest in Government stock are not eligible, they mostly have access to the tender of Government stock which was also announced on Thursday. They will be able to invest in one ordinary stock issue, carrying a coupon rate of 8 per cent, and two inflation-linked stocks. A total of S2SOM is sought in the three stocks being tendered on June 7, the results of which are expected to be

announced on June 8. Although this tender is significantly lower than the highly successful May tender, the Government has tentatively set July 12 as the date for the next tender. Sir Robert also told reporters on Thursday that the Government intended to continue with the tender system in the meantime. As the “Our New Zealand Bond” is due to expire on August 31, the same date the lending interest rate regulations are also due to

expire, and more tenders of Government stock are likely, the Government appears to be signalling that it will maintain a tight hold on liquidity and credit at least till that date, if not longer. In many institutions it is felt that Sir Robert will go into the election, due in November, with the same tight monetary policy, with perhaps promises in the Budget of the sort of relaxations that can be expected next year.