INTEREST RATES

Poverty Bay Herald, Volume LXIII, Issue 18991, 16 April 1936, Page 8

INTEREST RATES

RISE TN AUSTRALIA AN INEVITABLE INCREASE The influences which brought u'boul the rccenl increase' in interest rnios by the Australian hanks are discussed in the monthly summary of the National Bank 01 Australasia. According to this authority economic ami financial con side rat ions made the increase inevitable and the fact that ii did not take place sooner, it is suggested, was due to political consideration*. The increase oi' one-half per cenl in the rah's oi.' interest allowed on lixed deposits which was announced by two of the banks on March 2, was made effective by all the trading banks on March L'L The public idler ol: £1,000,000 of Treasury bills having a currency of three months and bearing interest at til per cent, the summary continues, "was not the cause of the increase. It may have precipitated action by some of ihe banks. On the oilier hand, the majority nf banks may have preferred to wait until after the Treasury bill issue closed. Certainly, by deferring their announcemcnl they avoided action which would have hopelessly prejudiced the Treasury bill issue. IRRESISTIBLE M.OA'EM KXTS "As it happened, the public subscribed for only fti 15,000 out of the £1,000,000 offered, but this poor re spouse is indicative of a rise in the whole structure of interest rates rather than of a reaction to the increase in rates allowed on bank deposits. Undue importance is being placed upon the rise of one-half per cent in bank deposit rates, and too little attention is being'given to the, forces which .affect interest rates in general." After pointing out that the rise was forced upon The banks in widespread and irresistible movcni""rs in trade, investment and fifranco, and associated economic activities,, the summary adds: "Outside observers have wondered why the rise was so long delayed. The increasing intrusion of politics into business of all kinds—including banking—provides one reason. It was known that any action likely to testrict, the abnormally easy condition which has been the mam characteristic of the money market during the past three years would be made a political issue of first-rank importance. Also, it was hoped that the higher prices ruling this season for wool, wheat, butter and metals would provide a large favourable trade balance, with a consequent increase in Australia's banking reserves in London. As if happened, the value of imports rose also, expectations of a growth in reserves faded away, and a rise in interest rates could be no longer deferred. GRADUALLY CHANG TXO MARKET "The money market has been changing gradually during the past IS months and its condition of case has tended to give way to a normal condition—one in which interest rates are high enough to induce an enlarged volume Of new savings, while new borrowings tend to shrink under the influence of rising rates. The movement may be retarded by sundry expedients, but it is undoubted that when the supply of new monetary savings is smaller than the demand for loans al a given level of interest rates, those rates will tend to move upward. The opposite movement, takes place when new savings exceed the effective demand of borrowers." The article, concludes by pointing [out that although during the past year bank deposit and lending rates had reacted very slightly to the upward pressure other sections of the money market had shown definite hardening tendencies. The index of preference share prices had fallen materially, the net return on Commonwealth -I per cent consols had moved from £.". 5s I'd per cent at the end of 1034 to £,?> 17s 7d per cent last month, while I lie in teres! rate on high-class first mortgage had risen from -I to -H per cent. The banks, it is pointed out, could not persist in ignoring the changes in the market, and the conditions indicated that they had been slow rathei Hum hasty in their action.