VALUE OF MONEY

Evening Post, Volume CV, Issue 141, 15 June 1923, Page 10

VALUE OF MONEY

THE LOCAL CONDITIONS

IS INTEREST RATE TOO HIGH?

SUBSTANTIAL CONCESSIONS MADE.

Interest rates charged by the banks, a matter of general concern to the farming and trading community, was a topic touched upon by the. chairman of the Bank of New Zealand (Sir G. Elliot) at the annual meeting to-day. He regretted, in his opening remarks, that "unfortunately for the banks, interest rates in London for short loans and Treasury bills—in which prudent bankers invariably .employ, surplus funds—have been at; a very-low figure,-our average return for the last year being only £1 18s 3d per cent, on the short loans, and £2 5s 9d per cent on the Treasury bills. As 4s 6d in the £ has to be paid to the Imperial Government in the shape of income tax upon our London profits, the net return yielded by these investments is correspondingly less than the rates just mentioned." The chairman subsequently referred to the reduction in January last by the banks of their minimum rate of interest j from 7 per cent, to 6g per cent. He explained that "the reduction of income tax last year, and the promise of a further reduction shortly, enabled us to reduce the rate on a great many overdrafts. Although 6£ per cent, is the quoted 'minimum' rate, we do not average that on the whole of our advances in New Zealand. Hard times disclose unsuspected weaknesses in the financial condition of many customers; so much so that, in some cases, we have found it necessary for the time being to forego interest, in others to ( make substantial concessions, the result being that the average rate of interest earned by our advances in New Zealand has been adversely affected. LITTLE TO COMPLAIN OF. "There is little probability of any further reductions in our advance rates while our overhead expenses remain so abnormally heavy. It is still difficult to borrow on fixed mortgage, even on a 50 per cent, margin, at less than 6^- per cent., hence it must be recognised that our borrowing customers have little to complain of since they have the advantage of paying on their daily balances only and not on the', siim'.we engage to lend them.. "Comparison is sometimes made between lending rates here and those ruling in Londonj .but such comparison is absurd, conditions being entirely different. Australian rates certainly bear a close relation to ours, although banks in.New.Zealand;are:;subject to a much higher income tax than they are in Australia. In comparing bank rates with '■those charged by private lenders and Government' lending institutions, the ser.vices rendered,by the.banks in conducting accounts are invariably overlooked; if. the public want facilities, they must pay, for them. WILL MONEY BE DRIVEN OUT? "The: rate of interest on mortgages under-'the moratorium, which expires next "year; .is fixed under the Act at 6^ per cent.- It has been suggested that the rate.may fall when the Act expires, but "unless there is. a decided fall in Australian i rates this is unlikely to happen; for mortgage rates, like the overdraft. rate in New Zealand, are to a large.' extent governed by- those ruling in Australia. Undue pressure on large lending institutions here to reduce the rate of interest would have the effect of ! driving money to Australia for invest- : mentr•*•;■■ ,'. .-■ ■ ■■•■■■■ ■ ■ '"The-fact must riot be overlooked that I a reduction in the lehding-.rate is sooner or .later' followed by, a 'reduction in the deposit rate, and those people who are j so insistent .that the lending rate should !■ be--reduced should- not forget the 700,----j 000' depositors in the Post Office and Trustees' Savings- -Banks—the thrifty frugal people of small or moderate means —-who ■■ would suffer from reduction in j interest rates. "In addition to the deposits of about £48,000,000 held by the Post Office and Trustees' Savings Banks, the Joint Stock Banks also hold interest-bearing deposits ; to the amount of about £17,000,000. The claims of the fixed depositors to receive a reasonable rate of interest must have the sympathetic' consideration of the banks; and, as any further reduction of the lending rates would necessitate a lowering of the interest allowed on fixed deposits, it will be readily understood that the banks are not disposed, for the present at any rate, to make any alteraDEMAND FOR INVESTMENTS. Sir George Elliot also touched on the London money market, and the demand for gilt-edged securities. Loan issue of Governments and local bodies, he said, had almost invariably been fully or over-subscribed, and rates had been improving in favour of borrowers. The securities of first-class industrial concerns also showed ,a decided improvement, though many might still be purchased yielding a return of close to 6 per cent. The Bank of England rate of discount was lowered to 3 per cent, m July last, and had remained at that figure to the present time. In the Dominion there had been more money available for investment than ■ during the previous, two years. Government and local bodies debentures and shares—both in banks and in first-class joint stock companies—had been the favoured investments. Money had also been available for mortgage purposes when the security offered had been satisfactory, and afforded .as' an ample margin. Very little new money had been lent_ on mortgage at lower than 6£ per cent., which might be regarded as the current rate for the best securities, though renewals had in some instances been arranged at a somewhat lower figure.