DISCOUNT RATE

Dominion, Volume 29, Issue 134, 2 March 1936, Page 8

DISCOUNT RATE

Announcement By Reserve Bank REDUCTION TO-DAY New r Minimum of 2} Per Cent. The Reserve Bank of New Zealand announces that the minimum rate for discounting or rediscounting bills will be reduced to 24 per cent, per annum as from to-day. As explained on the occasion of the last reduction in the rate which the Reserve Bank is required to publish in accordance with Section 13, subsection (1) of the Reserve Bank of New Zealand Act, 1933, there is no direct connection between that rate and the rate for overdrafts charged by the trading banks, and the two rates do not necessarily move together in all circumstances. .

lu periods of comparative monetary ease, the bill rate normally falls considerably below that for less elastic forms of financial accommodation; for example, "bank rate” in England, which is the Bank of England's discount rate for the highest class of bills (including Treasury bills), has for some considerable time been at least 2 per cent, below the rate ordinarily charged by the English joint stock banks for advances and overdrafts.

The Reserve Bank's published rate applies, of course, only to such bills as comply with the requirements of Section 13, sub-section (1) of the Reserve Bank of New Zealand Act, 1933, as amended by the Finance Act. 1934 (No. 2). EARLIER REDUCTIONS The Reserve Bank’s new minimum discount rate of 2-j per cent, represents a reduction of 1 per cent, on that ruling since July 29, 1935, when the rate was reduced from 4 per cent, to 3 J per cent. On August 1, 1934, when the Reserve Bank opened for business, it announced that, until further uotiee, the minimum rate’ at which it was prepared to discount or rediscount bills would be 4 per cent. This rate remained 'n force until July 29, 1935, when it was reduced to 3J per cent. The new rate, which, it is announced, will come into force to-day—namely, 24 per cent. — represents a total reduction of 14 per cent, on that fixed by the Reserve Bank on August 1, 1934. When the Reserve Bank’s discount rate was first published, it was explained that it applied only to bills which were payable in New Zealand, and which were covered by Section 13 of the Reserve Bank of New Zealand Act, 1933, as amended by Section 6 of the Finance Act, 1934. Being a minimum rate, it applied only to those elif gible bills which are regarded as firstclass—ffor example, a bill bearing the names of one of the other banks and of one of the principal merchant houses in New Zealand would be so regarded. Section 13, sub-section (2), of the Reserve - Bank of New Zealand ' Act, 1933, provides that “the bank shall at all times make public the minimum rate at which it is prepared to discount or rediscount bills.”

In his address to shareholders at the first ordinary general meeting of the Reserve Bank at WeUington on June 7, 1935, the governor o'f the bank, Mr. Leslie Lefeaux, said the bank’s discount rate was not of great significance pending the development of a bill market, but it served to indicate the bank’s views as to the level at. which the general public should be able to obtain financial accommodation against firstclass bills. Moreover, the bank would always take eligible bill? at its published rate from those with whom it was prepared to do business In his report on banking and currency in New Zealand, Sir Otto Niemeyer stated: “It may be said that in New Zealand there is no bill market, no short-loan market and, generally speaking, no money market in the full sense of the term, and that in the absence of these features the services that could be rendered by a central bank would be greatly curtailed. . . ■ I have outlined the principal advantages that would accrue from the establishment of such a bank, and I would repeat that, if the absence of such factors as a short-term market and a bill market leaves a gap in the financial structure of the country, the process of closing such a gap can begin in no more effective way than by the establishment of a reserve bank.