AMP sees higher real interest rates

Press, 22 April 1986, Page 26

AMP sees higher real interest rates

The AMP Society expects real interest rates (the difference between nominal rates and the rate of inflation) to remain higher than they have been during the past 20 years. “Interest rates have come down more quickly than most market observers expected,” said Mr John Dingle, manager for New Zealand for the AMP Society, "possibly because of expectations of a lower deficit.” Although there could be some hiccups, rates seemed to be on a definite downward path, he said. The big companies at least were aware that the cost-plus approach to pricing was past. They were absorbing cost increases and improving productivity — so far without a noticeable rise in unemployment, he said. “This probably reflects long-term confidence that they will need to retain staff for the future. Once they know the rules and also know that they are not going to change at the drop of a hat, the “en-

trepreneurs” are coming to grips with change and are doing well, as the take-overs of Australian firms demonstrates. Mr Dingle thinks that the farm sector will learn to cope. “The structure of farming may change, but the sector will be viable. “One of the downside risks is the huge borrowing requirement by the Government to fund the

deficit, and by the Government enterprises. This could be as high as $5OOO million, and some of this would have to be funded with overseas money. Mr Dingle said it was believed that the latest tender attracted quite a bit of interest from the United States. “At the same time, short-term interest rates are still high and we are still on an inverse yield curve.” Mr Dingle thinks that the days of cheap real interest rates (the difference between nominal rates and the rate of inflation) have ended, and that taxation forces lenders to look for real rates of at least 5 or 6 per cent. “If borrowers can deduct interest rates for tax then tenders should be entitled to a fair after-tax return.” The AMP Society had not raised existing mortgage rates in the last nine months, as it did not like to adjust rates too often. On the other hand, a downward adjustment would also have to wait.