‘No need’ for interest rise

Press, 19 December 1989, Page 3

‘No need’ for interest rise

By

PATTRICK SMELLIE

in Wellington

The Reserve Bank gave a strong signal yesterday that it saw no need for higher interest rates, despite higher inflation predictions in forecasts released last week. Previewing an article in its Decemberquarter “Bulletin,” the bank said factors pushing up inflation at present were expected to be short-lived. “Because interest rates have firmed in the past two months, the bank sees no need to tighten monetary policy,” it said. This comes as New Zealand’s lending institutions are making noises about putting up home-mortgage interest rates in the new year. While money-market interest rates dropped after the July Budget, with a consequent drop in mortgage rates, they have risen since to pre-Budget levels. Already the United Building Society has signalled possible interest-rate rises before Christmas for new borrowers, with rises possible for existing borrowers as early as February. Banks such as Westpac, the Bank of New Zealand, ANZ and Postßank have pinned the future course of lending rates on whether retail deposit rates rise. Retail deposit rates are the interest rates paid to small investors by banks. Signalling strongly that it would make allowances for certain inflationary factors in the economy, the Reserve Bank said the July GST increase, strong international prices for exported commodities, and the impact of unseasonal weathef on fresh-produce prices were big contributors to the worsening inflation outlook.

However, the bank said monetary conditions would need to remain firm over the next year “in order to achieve an inflation rate of around 4 per cent by December, 1990, and further progress towards price stability thereafter.” The statements appeared geared to add a new dimension to understanding of the way the Reserve Bank will pursue the Government’s stated goal of 0 to 2 per cent inflation by the end of 1992. The bank’s chief economist, Mr Grant Spencer, last week said that an agree-

ment on inflation between the Minister of Finance and the bank’s governor, to be signalled within the month, would contain a more complex goal than simply 0 to 2 per cent inflation. The bank’s explanations appear to follow concerns expressed particularly by the Manufacturers’ Federation that high interest rates were being used to punish the whole economy. This was inappropriate when the causes of rising inflation were good export prices, and bad vegetable-grow-ing weather, the federation has argued.

In the “Bulletin,” the bank said the “inflation outlook is not judged to be so unfavourable as to require tightening of policy in the immediate future, particularly given the relatively weak state of domestic activity.” Monetary policy is the tool the Reserve Bank uses to push up interest rates and the exchange rate to combat inflation. • Banks say it is full steam ahead for house loans, despite a year of pushing hard for market share and expectations of higher interest rates early next year.

A relative newcomer, Trust Bank Auckland, said it was lending about $25 million a month for home mortgages and had not noticed a fall in demand. The bank was lending about $8 million a month last December, a few months after setting up. The general manager, Mr David McLister, said yesterday it made sense for a bank to keep lending for home mortgages while it had surplus money. The bank could earn 14.75 per cent on home mortgages, compared with about 14 per cent on 90-day bills. ASB Bank’s general manager operations, Mr Hugh Burrett, said the bank was zealously lending.

ASB’s chief executive, Mr Dennis Ferrier, had issued a gloomy message on interest rates to customers on Friday. Westpac said it was lending from $l5 million to $l7 million a week and had a policy of increasing its exposure to the home lending market. During the corresponding period last year, Westpac was lending from $8 million to $9 million a week.