COMMERCIAL

Evening Post, Volume CXV, Issue 26, 1 February 1933, Page 3

COMMERCIAL

INTEREST RATES

PLEA FOR REDUCTION

TRADING BANK POSITION

, "Evening Post," Ist February. The general manager of the Bank of New South Wales (Mr. A. C. Davidson) welcomes the action o£ the Commonwealth Bank Board in reducing to a maximum of 4% per cent, the rate of interest charged on advances by the Commonwealth Bank. This, he hoped, would be an omen of further action by the Commonwealth ' Bank as Central Reserve Bank, giving a lead to and assisting the trading banks in reducing their rates of interest. Mr. Davidson has pointed out that trading banks are less free than the' Commonwealth Bank to reduce interest rates, by reason of their excessive taxation, the bigger proportion of interest they pay on their deposits; and their reduced receipts from investments. The trading banks' ability to make further reductions in their rates on advances is limited by the extent to which what they earn on advances and investments exceeds what they pay on deposits and in taxation. Much of that margin has already been sacrificed during the depression. Further reductions in. rates of interest on advances depend largely, therefore, on two things: (1) Further reductions of the interest the banks pay on fixed deposits; and (2) the expansion of their free deposits which would be incidental to a greater activity of trade. "The rates of interest on fixed deposits in the (Australian) trading banks now stand at 3% per cent, for two years, 3 per cent, for one year, and 2V4 per cent, for three months. The main rates are 2 per cent, lower than at the date of the adoption of the Premiers' Plan. Yet they are still high relatively to the rates obtainable for short-term money in London. Nothing there corresponds to our fixed deposit system, but as borrowers can obtain accommodation on trade bills, at a cost of 2 per cent., lenders are obviously paying less for money they borrow as middlemen. Bank deposits callable in seven days earn in London only half of one per cent. It is not surprising that London bankers regard our fixed deposit rates as very high in present circumstances." FIXED DEPOSITS. Still confining his remarks to Australia, Mr. Davidson grants that a "further reduction of the rates on fixed deposits by, say, half of one per cent, would ease the interest rates on advances both by trading banks and other financial houses. Ine wool report demonstrates that further reductions in these rates would be a welcome relief. The recent Wool Conference made it plain that they would be a timely lever in obtaining reductions of other charges, both private and governmental. Such reductions, though their influence must not be over-estimated, would mean some increased expenditure on the maintenance of country properties, an expenditure that of late years' has been skimped. "The recent steady fall in the yields of Australian consols shows plainly that interest rates are weakening under the slow influence of a declining demand for money. It would give a fresh impetus to business if this tendency were accelerated in the manner suggested above, viz., by the Commonwealth Bank buying enough Australian consols to bring their yield nearer to the new rate on two year fixed deposits. J.his would obviate big transfers from faxed deposits to Government securities, and consolidate the beneficial effect of the lower rate m promoting other forms of investment. With fixed deposit rates rates on advances would fall. The lower rates at which money could be borrowed" would bring new fields of expenditure within the scope of practicable business, and the way would be open for longer term borrowing by Governments to the degree held practicable and safe." ~ BANK OF NEW SOUTH WALES. Speaking on behalf of the Bank of New South Wales, Mr. Davidson said: "But I shall be happy to follow a lead from the Commonwealth' Bank in further action to reduce interest rates along sound lines Undue importance must not be attached, indeed, to the degree of relief from the pressure of low prices that can be gained by further reductions in costs. ,The recent Commonwealth Wool Inquiry Committee assessed the effects of the reductions in costs which it recommended at about Id per lb of wool. That would be a valuable gain in the struggle back to a balance , between costs and prices upon which we are-all engaged. But I am convinced that a rise in the prices of rural products, preferably in terms of sterling, but, failing that, in terms of Australian money, can alone bring economic recovery. It should not be beyond our powers to find appropriate prices at which to dovetail the production by Australian industries of the timber^ galvanised iron, wirenetting, foodstuffs, and clothing that we need in turning out a growing volume of exports to pay for our commitments and wants abroad. We have the physical capacity. Why not the, financial, too?"