‘More liquidity crises to come’

Press, 14 March 1985, Page 30

‘More liquidity crises to come’

By

MICHAEL HANNAH

in Wellington

Bankers have warned that more liquidity crises and a credit squeeze are looming in the wake of heavy monetary injections by the Reserve Bank which sent interest rates plummeting yesterday. The tight money supply and high interest rates of the last two weeks could be repeated in the next month to three months if the Reserve Bank withdraws the $9OO million it has injected into the system, or maintains a heavy programme of stock tenders in the next three months, bankers said yesterday. Their message for businesses was particularly strong, that banks may not accommodate businesses which expected to meet a high wage rise in September or heavy restocking. Credit would not necessarily be as available in the next six months as it had been in the last five months, one source indicated.

The injection of another S2SOM yesterday morning by the Reserve Bank achieved its objective by slashing overnight call rates from 200 per cent to just 15 and 20 per cent within the space of 24 hours. But the Reserve Bank has now pumped a total of S9OOM into the money supply by buying short-dated trading bank securities, all of which mature in the next 20 to 90 days, according to banking sources.

When the securities mature, the Reserve Bank can draw the money back, along with interest ranging from about 21 per cent to as high as 50 or even 60 per cent, banking sources said.

If the Reserve Bank takes the money back, liquidity could tighten again in April, May and June at least, they warned.

“We’ve got over one

hump, but there may be more humps to come,” commented Mr Max Bradford, executive officer of the Bankers’ Association.

“It’s fair to say that, while the immediate problems appear to have been substantially addressed, there is still a potential problem towards the end of the month and perhaps further down the road.” Bankers consequently expect the Government to announce a light programme for the stock tenders to be held in the next three months. The announcement is expected by the end of the week and is being awaited with a mixture of hope and trepidation by the financial sector.

Should the stock tender programme be as heavy as the last few months, when the Government has drawn up to S4OOM a month out of the money supply and into long-term Government stock, the outlook for liquidity over the next three months would be very tight. However, calculating the likely cash flows in the monetary system over this period is troubling financial institutions.

“It’s rather like juggling four or five balls, and trying to pick up another one off the ground at the same time,” one banker commented. Their calculations have to take account of: ® The fate of the S9OOM injected by the Reserve Bank through purchases of 20-day to 90-day trading bank securities;

• The injection of about SIIOOM in compensatory deposits to trading banks to cover the tax flow. These are due back to the Reserve Bank in 60 days, and carry an interest bill of 19.5 per cent;

® The size of the tax flow itself, as banks still have to meet 25 per cent of the immediate tax bill while

compensatory deposits make up the remaining 75 per cent, though the total tax drain by May will have had an effect on liquidity, • The Government’s need to fund its deficit through sales of stock.

Question marks hang over the likely impact of all these measures.

One banker yesterday suggested the Government would have to roll over its injection of S9OOM, or at least part of it, to maintain adequate liquidity levels when the securities mature. A light stock tender programme would also help keep interest rates down, the banker said.

The total impact of the tax take is unclear, as only about 16 to 17 per cent of the estimated total tax bill has been paid, even though taxes were due on March 7. Another unknown factor is the likely Government expenditure from April 1, the start of the new fiscal year. Although this will not have to wait for the 1985-86 Budget, the level of spending by Government departments, and more particularly their timing, is unpredictable, according to banking sources. Therefore, the extent to which Government spending will add to the money supply during the next few months can be calculated only on a rough basis.

The benefit from the Reserve Bank’s injections of money, however, has been to take pressure off longerterm loan rates, particularly for commercial borrowing and house mortgages, according to Mr Bradford.

Mr Bradford said the banks welcomed what the Reserve Bank had done yesterday and Tuesday with its input of money, but added that the move would have been more helpful had the Reserve Bank acted earlier.