WELLINGTON NEWS

Hokitika Guardian, 15 February 1929, Page 3

WELLINGTON NEWS

MONEY RATES HARDEN. [Special To The Guardian .] WELLINGTON, February 13. On Thursday, February 7, the Bank of England discount rate was raised from <4 per cent to 'ss- per cent, and the incident has passed without any comment either from newpapers, bankers, or financiers; in fact not the least notice has been taken of the event. Apparently the raising of the bank rate is presumed to have nothing to do with us, and furthermore money is tending to become easier in the Dominion. Those who fancy that the Bank of England rate has nothing to d 6 with New Zealand arq labouring under a great delusion. Money rates impinge on the every day life of the people, and all the intricate and numerous ramifications of trade and commerce and even Stock Exchange speculation as in the case of the United States are carried on more or less with borrowed money. One has merely to examine a dozen or so balance sheets and it will be found that the great majority of the companies concerned is carrying overdrafts. All our exports of primary products will feel the effects of this hardening of the money rates. Here for instance is a Bradford firm prepared to buy New Zealand wool, basing calculations on a basis of 4-J per cent. Now that same firm has to pay 1 pei cent more and obviously the firm must cut down or economise in some direction. Perhaps it buys less wool, or reduces its price limit. It will be very surprising if the next wool sale in New Zealand does not show the direct effect of dearer money. As with wool so with butter and cheese and frozen meat and the other products we export, so that it will be realised that an adverse movement in the London money market is felt everywhere, and New Zealand is not immune.

The Bank of England raised its rate from 4 per cent to 5} per cent and it would be thought that raising the rate by per cent to 5 P e >' cent would be sufficient. It is the custom of the Bank of England when it decides on raising the discount rate to move up by 1 per cent- and when the rate is lowered to reduce by £ per cent. That is the custom of the Bank, and it is no doubt a wise one. On April 21, 1927. the Bank rate was reduced from o per cent to 4 P« r cent, an d this rate was in force until Thursday last, a period of over 21 months. As the rate was reduced, the rediscount rate of the Federal Reserve Bank of New York stood at 3} per cent, hut when speculation on the New York Stock Exchange became intense the Reserve Bank raised its rate by i per cent on three occasions, bringing the rate to 5 per cent. This was effected on July 13 last year and ever since then and until a week ago money was dearer in New York than in London so far as bank rates were concerned. On the Stock Exchange of New York what is technically known as call money, that is money lent for no fixed period and callable at any moment. Such loans are generally made for the day or over night, ranged between 6 per cent and 12 per cent, and time money, that is money lent for a period of CO days ruled at about per cent to 8 per cent. The high rate for call money attracted a good deal of money to New York from within the United States and from Europe and the position was so good that American banks called in their balances in London and elsewhere in Europe, and this caused a strong demand for dollars. The exchange value of the pound sterling u as again and again at gold point, that is the point at which.it becomes more profitable to ship gold rather than buy exchange. The United States and Germany both made serious attacks on the gold reserve of the Bank of England, but the Bank had accumulated a very large amount in the early autumn —the gold in the Issue Department early in September exceeded £173,900,000—so that the Bank could part with some of the yellow metal, more especially as £150,000,000 in gold was laid down by the Cunliffe Commission as the Minimum that should be held by the Bank when the treasury currency notes passed under its control. Last week, however, the reserve fell slightly below this level and up went the discount rate. Money is dearer in London than in New York, and the tendency will he for money to gravitate towards London. Money like uatei will find its own level. The exchange advanced immediately the Bank acted, for on February sth the rate was 4.81 25-32nds dollars, and three days later it went up to 4.85 11-16ths dollars. The New York Exchange has received a warning to deplete gwidually but this is not quite so easy. The swing of the pendulum will he as violent going back as it was going forward.