LOW BANK RATE

Wanganui Chronicle, Volume 74, Issue 115, 18 May 1931, Page 8

LOW BANK RATE

“MOST HOPEFUL PORTENT” THE INFLUENCE ON PRICES ASPECT OF LONG-TERM CREDIT AUCKLAND, May 15. “It is not possible from this distance to offer an adequate explanation of the causes for the reduction to 2J per cent of the Bank of England discount rate,” said Professor H. Belshaw yesterday, “but it is reasonable to suggest that it. is indicative of an improvement iu the short-term money market and may well presage the beginning of the period of recovery. “Signs have already been in evidence of improved conditions in the United States and of th. retardation in the movement toward depressions in the United Kingdom. The lowering of the Bank of England rate will have important effects, both in the cheapen ing of short-term credit and in the psychological influence which it is likely to exert. It is quite likely that it may be an important factor in encouraging a spirit of optimism and leading to business recovery. Attitude of Trading Banks. ‘ 1 The extent to which it will be an influence causing an improvement in prices will depend in a large measure, though not entirely, on the extent to which the commercial banks follow the lead of the Bank of England in lowering their rates on deposit and overdraft. Some time ago there were complaints in England that the commercial banks had not followed suit in this way and the action of the Bank or England may be partly negatived if the commerical banks do not follow suit. • “The most interesting question to me, and one which only the future will answer, is whether or not the recent policy of the Bank of England ana of other central banks may be regarded as the beginnings of an era of lower interest rates. “Tne Bank of England may, if it chooses, force the joint stock banks to lower their rates by buying securities, thereby freeing funds for investment. If this is done, and if the central banks of the world are prepared to continue their policy of low discount rates, it will not be long before not only shortterm rates, but also long term rates, will fall in sympathy. Effect n Long-term Loans. “Air J. M. Keynes, in his recent book ‘A Treatise on Aloney,’ considers that for some years long-term rates have been artificially high and that this factor was in large measure responisble for depressed conditions. He went so far as to say that a lowering of rates was essential to any considerable measure of permanent recovery and considered that positive action should be taken by central banks to bring interest rates down to a lower level. “If Air Keynes’ views are correct, and I believe they are, the persistence of low rates for some time and the present action of the Bank of England in lowering the discount rate to the very low level of 2$ per cent, raises interesting and extraordinarily important possibilities. “The lowering of the rate, which should encourage speculative activity and the buying-up of stocks, should be reflected in an early improvement in prices of such commodities as wool, but of even greater importance will be the effects on the rates for long-term loans if the low rates persist for any length of time. By and large we may regard the lowering of the rate as the most definitely hopeful portent which has appeared for some time.”