Govt sees inflation as boosting interest rates

Press, 12 November 1985, Page 8

Govt sees inflation as boosting interest rates

PA Wellington The Government had to ensure that its borrowing needs did not “fuel” high interest rates, said, the Prime Minister, Mr Lange, yesterday. Tiiose borrowing requirements should not produce expectations of interest rates above the level otherwise dictated by the financial market, he said at a press conference. Discussing a three-week-old statement by the Minister of Finance, Mr Douglas, concerning short-term liquidity management, Mr Lange said that did not imply changes in Government monetary policy. “We will pitch our requirements for money at a level which is appropriate on our assessment.”

Mr Douglas later said that a decision on a review of liquidity management, which would relate to the Government’s stock tender programme, was expected within the next fortnight.

Mr Lange also indicated that there had been “a shift in emphasis” towards the Government’s blaming inflation for high interest rates, instead of blaming the size of the deficit of Government spending over income.

However he said that there was a batch of causes and it was “ludicrous” to “ditch the deficit” as a “generator” of high inflation and interest rates. Last week the Leader of the Opposition, Mr McLay, called on the Government to use its position as the largest borrower in the market

to force down interest rates. Mr Douglas also announced an amended programme for the sale of Government stock after an increased forecast in the deficit of up to $l6OO million. But he said that the Government would maintain its present monetary policy on the funding of public sector spending. Three weeks ago Mr Douglas said that he was considering short-term liquidity management. “I am looking at Treasury’s role, its borrowing activities in New Zealand, its impact on liquidity and interest rates,” he told the Otago Chamber of Commerce.

Mr Lange said yesterday that the aims of such a review would be to ensure

the Government was not itself generating expectations of higher interest rate returns than the market would dictate. Over the last week shorter-term interest rates have continued to ease. Asked if Mr Douglas’s review of primary liquidity would lead to easier money and an increase in the money supply, Mr Lange said the Government would not “go into that sort of expansionist mode.” Mr Lange indicated that he had thought “we were actually moving to absorb more (money) than we needed”. He had told Mr Douglas and the result had been the Minister’s statement with the result “the rate came down”. Mr Douglas’s statement had talked down rates.