Interest cut may lower dollar

Press, 16 August 1988, Page 1

Interest cut may lower dollar

By

NEILL BIRSS,

business editor

Banks began lowering interest rates yesterday as the money markets responded to a call from the Reserve Bank to drop rates.

Falls in mortgage interest rates are likely soon, but the most important effect will be on the Kiwi dollar. Monetarists will expect it to fall as interest rates fall. If it does, the beginning of an export-led recovery may be round the corner.

Sir Spencer Russell, governor of the Reserve Bank, issued a call for lower interest rates on Friday. There was immediate reaction, the bench-mark Government stock, maturing in

November, 1993, falling 0.16 percentage points. Wholesale rates went down with a bang yesterday. November, 1993, stock traded at 12.87 per cent, compared with 13.2 per cent at lunchtime on Friday. Shorter-term interest also fell sharply. Ninety-day bank bills closed about 14.35 per cent after bills traded as low as 14.25 per cent during the day. This compares with 14.85 per cent at lunchtime on Friday, before the Russell announcement. Dr Brent Layton, manager of Egden Wignall Futures, described the moves yesterday as significant, especially in bank bills. These are now at their lowest since 1984.

“When the Governor of the Reserve Bank says ‘lower the rates,’ you do it or lose your shirt,” Dr Layton said. The critical question now is whether the downward trend holds. The rates had been rising in recent weeks despite falling inflation.

The Bank of New Zealand will cut its base lending rate to 15.75 per cent from 16.75 per cent next Monday. This is the rate at which the biggest and best customers borrow. First-mortgage loans will fall from 16.5 per cent to 15.5 per cent. Visa card credit interest will fall 1.5 per cent in the next billing cycle from 23.5

per cent. Mr Bob McCay, the chief executive of BNZ, said a further drop of one percentage point in the base rate was likely within a month. The bank says it would

try to reduce lending rates at least two percentage points over the next month. Mr Richard Bray, deputy general manager of Trust Bank Canterbury, said the wholesale money and Government stock rates had acted quite positively

to the Russell announcement. The bank, whose house-mortgage rate is 16.75 per cent, would watch the markets closely over the next few days. “The markets are the key.”

Sir Spencer Russell said in his statement that interest rates had not fallen to the extent justified and were putting unnecessary pressure on businesses and households. The first to drop rates yesterday was the National Australia Bank (N.Z.), formerly Broadbank. It is reducing its base lending rate to 16 per cent from 17 per cent next Monday, and the home-mortgage rate for new borrowers from 16.75 per cent to 16 per cent. Westpac’s public relations manager, Mr Bill Day, said the bank had looked at interest rates last Friday but had decided it would wait for further reductions

in deposit rates before moving

on lending rates. An A.N.Z. spokesman said deposit rates should be easing now, and this could lead to lending rate cuts in about a month. Already there is some scepticism that interest rates will continue to fall for the rest of this

year. Mr Roger_ Garrett, the

economist for DFC New Zealand, believes that the fall in inflation this year will be offset in the money markets by a huge demand for money from the Government’s privatisation policy and State-owned enterprises making repayments for assets. The portion of this raised domestically is likely to be be-

tween $1.5 billion and $2 billion, Mr Garrett estimates. But in the long term, the reduction in Government debt should see interest rates level off.