Reserve Bank to stabilise money supply

Press, 16 August 1984, Page 3

Reserve Bank to stabilise money supply

By

MICHAEL HANNAH

in Wellington

The Reserve Bank announced steps yesterday to broaden the base from which the Government could finance its deficit and so stabilise monetary growth and interst rates. The announcement could affect the latest tender of Government stock, due to be held today, because it includes the selling of shortterm Government securities to a wide range of institutions which have not had access to them before, but which can bid for longerterm stock in the tender. the moves could also foreshadow the elimination of reserve asset ratios, which regulate the proportion of reserves that certain institutions must invest in Government stock. The Governor of the Reserve Bank, Mr Spencer Russell, announced yesterday that the bank would start this week regularly selling shorter term stock on the secondary market. Its plans include selling $l5O. million to $2OO million in the next month in stock maturing in 1985 — at least a year before any of the Government stock offered for tender today. The money market expects the interest rate offered to be between the 7 to 8 per cent carried by Treasury Bills and the 14 to 15 per cent expected to be accepted in the tender to-

day. This could provide an at-

tractive investment, particularly to institutions such as finance houses, life offices and building societies, which must hold Government stock.

The proposal, according to one economist, is consistent with the Government’s aim of keeping a tight hold on the money supply, thus dampening credit growth and lessening the risk of a rise in inflation. The Reserve Bank said it would initially limit transactions in the new stock to parties who could invest at least $1 million in individual parcels. It hoped that later transactions could involve both buying and selling. The aim would be to ensure that the level of liquidity in the financial system was adequate for settlement purposes, but was supplied at a price consistent with an over-all stance in monetary policy. The Associate Minister of Finance, Mr Caygill, was asked by “The Press” to explain the purpose of the move. He said that it was a move to a system where the Government financed its deficit on the open market rather than by compulsion. Asked whether the move forshadowed the end of the reserve asset ratio system, he said that this was a “perceptive” reading of the measure.

“With this system in place, we need to rely far less on the ratios as a means of financing the deficit,” he said.

An economist said he believed that the measure

would stabilise the money supply, because it opened up the investment of Government securities to far more institutions than the trading banks. It could, therefore, have an impact on interest rates, because these were largely determined by the Government’s need to compete .for finance for its deficit from a small base. Other measures announced by the Reserve Bank included an “active” investigation into the tender of Treasury bills. This was also read as a means of broadening the base from which the Government could obtain finance through the sale of Treasury bills. At present they are generally limited to trading banks.

The Reserve Bank also announced that its discount window for Government securities was now open to all persons, as was access to the bank’s portfolio of Government securities with six months or less to maturity. Increases in the discount margins from the Reserve Bank were announced on July 23, but previously these were open only to trading banks.. One source said that this move was expected to make institutions more conservative in cashing their securities with the Reserve Bank, because the discount margins meant they would lose one percentage point on the normal return from the securities if they were liquefied. Reserve Bank statement, page 22