Brokers blame T-bill pressure for rates

Press, 5 December 1988, Page 19

Brokers blame T-bill pressure for rates

Wellington reporter

Huge issues of Treasury bills provide one major reason why interest rates have not been following the inflation rate down, sharebrokers, O’Connor Grieve, say in their latest newsletter.

While high inflationary expectations over the last year had contributed to interest rates staying higher than they might have otherwise, the “immense pressure” placed on the short term end of the market by large Treasury bill issues was also to blame.

O’Connor Grieve is picking that interest rates will fall over the next six months to more “normal” levels, in light of lower inflationary expectations

and less pressure from Tbills.

“We are not forecasting interest rates which would be supportive of a strong recovery in the New Zealand economy,” the newsletter said.

While the productivity improvements coming through in industry were positive for the economy they needed to be backed by strong investment, which required lower financing costs.

“However, we see scope for significantly lower interest rates if the Government reduces the amount of T-bills on issue to about $1.2 billion (as high as $5 billion during this year), concentrates borrowing at the long end of the market and demonstrates determination to reduce the

financial deficit. “Further contributions could be a final settlement of the interest income witholding tax and the tax treatment of superannuation funds.

“A favourable solution to these problems could drive interest rates down by about 2 to 3 percentage points across all maturities,” the newsletter said.

O’Connor Grieve predicted that New Zealand short term interest rates would now remain below Australia for some time, but that our rates would remain high by international standards due to high national debt.

“From a fundamental point of view, the New Zealand economy compares favourably with the Australian economy,” the newsletter said.