THE PRESS TUESDAY, DECEMBER 17, 1985. Interest rates and the $NZ

Press, 17 December 1985, Page 12

THE PRESS TUESDAY, DECEMBER 17, 1985. Interest rates and the $NZ

The lower interest rates on some loans and the dramatic fall in the value of the New Zealand dollar are both welcome news before the New Year. For many, they have arrived not a moment too soon. The lower interest rates are to be seen mostly in wholesale rates of money, though two trading banks have dropped the indicator rates, which should mean slightly cheaper rates to the individual borrower. The Manufacturers’ Federation is already predicting that its members will have to reconsider plans for lay-offs now that interest rates and the value of the dollar have come down. Mortgage rates are expected to be affected, but they did not climb as fast as other interest rates and they may be slower to come down. Three factors, have influenced the interest rates. The first is that some inflation figures, particularly the food price index figures, have been lower and this is not only good in itself but it has an effect on expectations of inflation. The second is that the economy is expected to slow and this leads to a lower demand for credit. The third important factor was the move at the beginning of the month on short term liquidity. This meant that the Reserve Bank had greater discretion in resolving problems of short-term liquidity. This did not amount to a change in Government policy, merely altering the technique by which day-to-day liquidity problems were handled. Sometimes a firm which wanted money for a brief period, say 24 hours, would have to pay a premium of 2-3 per cent because those lending the money were so uncertain about how interest rates would move that day, or in the next day or two. Now there is a greater sense of confidence about shortterm money. Occasionally interest rates will continue to jump; yesterday, overnight money was again up to 26 per cent. Sometimes the jump may be higher. Interest rates of 100 per cent were occurring at least once a month between July and September. But, generally, demand for short-term money has eased and is expected to continue to ease.

The fall in the value of the dollar is

intimately connected with the lower interest rates. As interest rates drop, fewer overseas investors are keen to put money into New Zealand to get high interest rates. This means that there is less overseas money chasing New Zealand dollars and, as demand slackens, the price falls. Furthermore, as interest rates fall, fewer New Zealand firms will be tempted to go offshore to borrow money. Again, this has the effect of less overseas money chasing New Zealand dollars. The fall in the value of the New Zealand dollar has been marked — amounting to about 14 per cent within the last two weeks. Yesterday’s rate of about 49 U.S. cents against the New Zealand dollar contrasts with about 57 U.S. cents against the New Zealand dollar earlier this month. The interest rates fall will have the biggest immediate effect on most people, though the fall in the value of the dollar could have a profound effect on the attitudes of exporters who have been planning for next year. If exporting becomes competitive again, particularly in the Australian market, it will give a different complexion to New Zealand’s trading outlook. Yet it would be rash to believe that these recent indications are to be taken as the final indications that the New Zealand economy is now on a smooth path. World-wide interest rates tend to fall slightly in December. There is bound to be a demand for money to meet the tax deadline in March. But if the path of interest rates proves to be downward, even with the occasional jump, then there is good reason for cheer. -What the last few weeks have shown, at the very least, is that interest rates need not be regarded as being “locked in” as some commentators have suggested. The change in the value of the dollar has shown that one must expect some very big fluctuations under a floating dollar regime. If a 1 per cent change can be the difference between profit and loss, the 14 per cent change is a major movement. Those engaged in exporting — and importing — will continue to need good daily advice' on how to handle their businesses.