Interest rates fall below market predictions

Press, 19 April 1986, Page 1

Interest rates fall below market predictions

By

SIMON LOUISSON

in Wellington Interest rates in the Government stock tender yesterday tumbled further than market predictions, and money market dealers suggested that the structural change in interest rates had finally arrived.

The money market was taken aback by the extent of the fall, rates dropping between 1.5 and 1.8 per cent since the last tender earlier this month.

Although rates had fallen 1.75 per cent on the secondary market over the last two weeks, dealers expected rates for the $5OO million tender to be slightly higher. Instead, because of aggressive bidding and strong offshore interest, rates were lower and fell 0.5 per cent further on the secondary market after the tender. The weighted average rate for three-year stock was 18.6 per cent, compared with 20.4 per cent on April 3. Five-year stock fell from 19.7 to 17.9 per cent, and eight-year stock dropped from 18.8 to 17.3 per cent. Coinciding with the fall in stock rates was the

announcement by the A.N.Z. Bank that it is dropping its lending rate 0.5 per cent. The drop applies to second mortgages, personal overdrafts, term loans, fully drawn advances, and special home finance loans. A.N.Z. has a variable base rate. The bank said the fall was not as a result of the tender but a direct reflection of the fall in wholesale deposit rates in the last few months.

The drop in the A.N.Z. rates follows up the National Bank’s 0.5 per cent cut in its rates earlier in the week. B.N.Z. has no immediate plans to cut its rates although it reduced its wholesale deposit rates recently. However, Westpac Bank mortgage holders received notice yesterday that their rates will increase on April 28. A spokesman, Mr Geoff Thompson, said it reflected a rise in deposit rates and Westpac borrowers had had their rates held below the rest The United Building Society says it is still experiencing strong demand for finance and will

not cut its rates until it is forced to by market pressure.

An economist, Mr Paul Bevan, of F.A.S.Macquarie, said that the drop in interest rates looked to be permanent rather than temporary. Inflationary expectations were moving down and domestic demand for funds was weakening as the economy was slowing.

The tender was overbid five times with $2.7 billion of bids, which indicates that institutions were flush with money. Mr Bevan said that this, and the fact that they were finding it harder to place money, would give them further incentive to drop rates.

However, a fall in Government stock rates usually takes more than three weeks to translate through to retail rates and much longer for mortgage rates to fall.

Money market dealers were in a jubilant mood after the tender result, some suggesting that the result was a vote of confidence in the monetary policy. Sharebrokers picked up $254 million of the $5OO

million stock available. As sharebrokers usually act for third parties, analysts interpreted their bids as an indication of strong offshore interest. New Zealand bonds were strongly tipped by at least one international finance house last week and local dealers said the offshore interest was based on a belief that the Government’s economic policies were working.

United States sevenyear stock is selling near 7 per cent, 10 per cent lower than New Zealand rates. The Minister or Finance, Mr Douglas, commented that the market in Government stock was fairly volatile, and that the movement in interest rates would probably continue to be volatile “but around a downward trend.” The Government’s monetary stance would continue to be consistent with a declining inflationary rate, Mr Douglas said.

The sixth issue of Kiwi Bonds will open on April 24 at 17.5 per cent for two years and 17.0 per cent for four years.

Tender rates, page 21