Interest rates set to drop

Press, 28 July 1989, Page 4

Interest rates set to drop

By

PATTRICK SMELLIE

Interest rates look set to fall as a result of the Budget. Financial markets reacted positively to the news of a Budget surplus of $3.1 billion, but were even more enthused about the Government’s plans to issue $1 billion of new long-term Government stock in the coming year. This would provide the mechanism to allow the drop in interest rates which the National Bank tried to force earlier in the month and was forced to abandon. The creation of a new five-year Government stock would give impetus to the long-term interest rate falls which the Reserve Bank has insisted on before allowing interest rates for small borrowers to fall. Long-term Government stock rates fell in anticipation of the Budget to about 12.8 per cent — their lowest level since February. Dealers predicted they could settle as low as 12.5 per cent in trading today. This would be more than half a per cent down on rates prevailing last week. If sustained this would feed into short-term money market rates, where interest rates for small borrowers are determined. This could allow mortgage rates to start falling in the next couple of months, after a hiatus for the best part of a year. While the Government is issuing $1 billion of debt, it will not add to its stock of borrowing. This is part of the key to the positive reaction among interest rate setters last evening. Futures trading details, Business, page 14