More liquidity to foil ‘play’

Press, 2 December 1989, Page 32

More liquidity to foil ‘play’

By

PATTRICK SMELLIE

in Wellington

The Reserve Bank yesterday moved against cash plays at the short end of the money market, attributed to three of the country’s largest banks.

The Bank of New Zealand, National Bank, and Westpac were all fingered by other financial market players as attempting to take advantage of end of month liquidity tightness.

This month has seen unusual factors related to attempts by a variety of institutions to get advantage from or extricate themselves from the fiasco in the bond futures market created by the Jordan Sandman Futures default almost a fortnight ago. Westpac was badly caught in the default, being left almost alone on the short side of the market with a very large position.

To counteract cash rates reaching 15 per cent and above, the Reserve Bank yesterday morning announced a temporary increase in the daily cash target from $3O million to S4SM. The daily cash target is the aggregate or total balances of the nine settlement banks with the Reserve Bank. The tactic has been

used in the past when the Reserve Bank has become unhappy with the level of short-term interest rates.

The cash target would be reviewed on Monday, the Governor of the Reserve Bank, Dr Don Brash, said. But market players expected the increased target to stay in place for at least another day.

’ Dr Brash emphasised that the Increase did not represent a loosening of monetary policy. Ironically, the bank’s action came on the same day as producers price index figures showed a 2.6% increase for the September quarter. Dealers said five-year Government stock rates reacted first to the cash loosening by ’ falling slightly, then rose later in the day in response to the worse than expected inflation outlook Implied by the PPI result

February 1895 Government stock was trading at 12.34 per cent late yesterday, compared with 12.29% at the start of trading. This may also have reflected the general desire of many institutions to start squaring their books before the Christmas break, dealers said.