HIGH INTEREST RATES

Taranaki Daily News, 27 February 1931, Page 12

HIGH INTEREST RATES

i POSITION IN AUSTRALIA. EFFECT OF STATE BORROWING. There is growing demand for a reduction in the high interest rates currently ruling with the trading banks, says the Sydney Morning Herald, and in quarters which have been attacking the banks it is usually alleged that the banks could reduce the interest rate if they desired, but that they do not so desire. The banks’ reply has consistently been that it is not possible to bring about reduction while Governments -will pay high rates for any credit that may be available, and while, indeed, the Federal Government itself offers so high a rate for money as 6 per'cent, free of State income tax. It is understood that if the Commonwealth Treasury could see its way clear to reduce the interest offered on Commonwealth bonds sold over the counter- from 6 per cent, to 5, this reduction could promptly be reflected in the general bank rates.

The Commissioners of' the State Savings Bank of Victoria recently reduced the rate of interest on mortgages to 6 per cent, per annum. No corresponding action had been taken by the Commonwealth Bank, but although the ordinary overdraft rate of the bank is per cent., tlie rural credits department of the bank charges only 6 per cent, on advances.

The trading banks in Victoria have no fixed overdraft rate, but in most instances from 7 to 7% per cent, is charged. In the bankers’ view, interest is rent of capital plus risk. Where the risk is large a high rate of interest is charged, and where it is low and other profitable business flows from the same customer, a rate lower even than the usual minimum of 7 per cent, may be paid. The chairman of the Associated Banks, Mr. C. H. Tranter, explained that very often the bank rate worked out at very much less than the stipulated overdraft rate. For instance, if a customer had an overdraft limit of £lO,OOO he would expect the bank to have the full sum available for him in case he required it, although he might eventually use only half the amount. It would not be safe for the bank in the meantime to lend the unused balance of the £lO,OOO to any other customer, and interest on it would thus be lost. Mr. Tranter did not think the trading banks could safely reduce their- overdraft rates without also reducing their deposit rates, as the one must bear a direct relationship to the other.