Rocketing interest rates hurting some firms

Press, 12 March 1985, Page 26

Rocketing interest rates hurting some firms

The liquidity crisis is beginning to bite Firms which have been getting by in liquidity by turning over 90day bills are being brought up with a shock with the current rates of almost 35 per cent. Some other, more established firms have been receiving notes from their banks advising of new penalty clauses for those abusing’ overdraft-type loan facilities.

Firms which have been financing longer-term credit from short-term sources such as overdrafts and bills are locked in a high-interest vice. At the same time, the high interest is drawing money out of nooks and crannies into the bill and short-term money markets. At least one share club has dissolved and put its money into bills. Imminent big purchases by firms have been delayed to dabble in the bill market Those with money locked in lower-interest term loans have in some cases been berating bank staff because they find they cannot get their money out and into bills. There are reports of assets being sold at a loss to reduce firms’ current ratios.

The soaring interest rates continue. Yesterday, more than 500 per cent was being paid on overnight cash on the money market despite the Reserve Bank’s injecting SIS4M worth of cash into the monetary system yes-

terday, by selling shortterm securities. The bank was active yesterday morning in terms of .its policy announced last Friday, which said it would intervene this week to help bring cash requirements down to a more reasonable level, reports the Press .Association. Dealers were surprised that the bank did not inject more money into the system, and were surprised that the bank was not buying securities again yesterday afternoon. A spokesman said the Reserve Bank bought a range of TCD's (transferable certificates of deposit), bank bills, and commercial bills, from a range of sources. He declined to reveal the rates paid for the securities. The call market opened yesterday at 100 per cent (buy) and 350 (sell) and firmed steadily through the day until rates of up to 550 per cent (buy) and 950 per cent (sell) ’ were being quoted at 3 p.m.

Dealers said no deals were done at these high rates, but that several million dollars were traded at just over 500 per cent. Trading was much quieter than on Friday when up to 750 per cent was paid for call money in hectic ingThere were no special factors in the market yesterday other than the rantinned tight liquidity caused by the tax drain, which was eased only slightly by the Reserve 'Bank’s 'inte’rven-

tion. Dealers said many people were waiting to see which way the bank moved later in the week. It was passible the bank was limiting its intervention in the knowledge that some S4OOM worth of interest on Government stock would be paid out on Friday, which should assist cash positions in the market Dealers said they doubted the high rates being paid on overnight money by financial institutions would have an immediate effect on the general public or on public interest rates. But this could change

quickly, especially in the light of tie Government long term stock tender due later this week. They said that the nominal rate for 90-day prime commercial bills was still extraordinarily high at 34.50 per cent yesterday, though this did represent a drop from Friday's peak rate of 35.45 per cent. Dealers said the bill rate tended to reflect over-all medium term interest rates in the community, and longer-term high ’interest rates for the public were likely if extraordinarily high rates were accepted for the stock tender later this week