Firm rates likely to continue

Press, 20 December 1986, Page 30

Firm rates likely to continue

PA Wellington Interest rates are likely to remain at their current firm levels until well into January, according to money dealers. They said a combination of Reserve Bank liquidity tightness and adverse econcomic data gave no cause for hope that rates would come down quickly.

In the medium-term and longer-term, however, they should start moving down again, in tune with a lower rate of inflation.

Several dealers said yesterday’s Government stock rates looked good buying at 17.4 per cent for five years and 16 per cent for 10 years, but they said rates could be just as high, and higher, in January.

Confusion over the exact size of the Government’s budget deficit, the “mystery” method of funding the deficit and the delay in announcing the forward stock tender programme had added to the uncertainty, they said.

The result was a thin and volatile money market in which rates could move quickly on smallish turnovers. However, the trend in the past two months had been steadily upward.

Dealers noted that Thursday’s figures for October retail sales revealed a lower post-GST spending level than had been expected, and wondered if this might lead to an easing of the tight short-term regime early in the new year. But currently the shortterm market which has on-

call rates steadily above 22 per cent and 90-day bill rates around 23 and 24 per cent is putting a solid squeeze on the financial markets.

Any market participant wanting to take a position or fund an activity was finding it expensive to raise money in the short-term when rates of 22 to 24 per cent are the norm.

Against that, it was worth noting that a slowing down of activity, leading to reduced inflation, is the Government’s stated monetary aim, they said.

Dealers said the retail money market covering mortgages and similar loans was doing its best to hold off matching the wholesale market, in the hope that rates would come down soon. But actions like that of the ANZ Bank in increasing its index rate twice during December would indicate a losing battle, and would help cement in a high-rate regime.

Short-term rates firmed again yesterday with on-call money at 23 per cent (22.4 per cent on Thursday) and prime 90-day commercial bills at 23.6 per cent (23.1 per cent). There were no Reserve Bank open market operations again, with still $420 million of the December stock tender having to be settled by Monday.

The long-term market was steady in quiet trading at 17.45 per cent for five-year bonds and 18.8 per cent for three-year bonds.