Sharechat Logo

Key ministers grapple with the backbench rumpus

Friday 7th July 2000

Text too small?

The government's only effective control over interest rates is negotiation with the Reserve Bank over the target inflation rate range.

General economic policies affect the rate structure indirectly through the reaction of the Reserve Bank when it sets the official cash rate (OCR) which flows on to wholesale and interest rate yields and then to retail rates

The OCR was 6.0% in late June, being raised to that level in April from 5.75%. This week the Reserve Bank made no change.

Observers and dealers anticipated the move to 6%. Wholesale yields had little movement between the end of April and end of May, although retailers showed some catchup.

Tables III and IV detail yields since the election. The range of rates in Table IV reflects differences between leading financial institutions which depend on their particular mix of deposit and lending portfolio maturities and the occasional special circumstances leading to decisions to seek more money.

Short-term rates rose considerably at the short end of the wholesale market (three-month bank bills) and the retail market (one year and less) from the election to late June.

Longer-dated government stock yields - the three in Table III - were almost the same as on November 29, after rising earlier in the year and fluctuating under the influence of changes to the OCR and deals of individual market players. Again, too much could be read into rate movements and the effect of government activity on them.

A decision of a substantial overseas-based holder of government stock to dispose of an investment for internal or technical reasons could push the price down on a particular day. Supply and demand decide the price and if it went down the yield would go up.

The impact of government decisions on the OCR and other rates can be seen in the increase in tax on tobacco with additional price increases after manufacturers and the rest of the chain applied their percentage dollar margins to the higher dollar tax.

Any blowout in government estimates of the balance between its revenue and expenditure is another factor for consideration when assessing future yield movements.

The government has been "getting the message" about interest rates and other matters affecting business and investment markets privately, away from the rhetoric of press statements. Whether key ministers or the backbench rumpus of the coalition partners gain or keep the ascendancy will decide the outlook for markets.

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

The year of investing dangerously
Terrorist attack intensifies the slowdown in industrial metals
Gulf War debunks theory of flight to gold during crises
'Three-tier' approach finds favour
Investment Strategy
Superannuation rears its controversial head again
Currency hedging is a prudent strategy
Futures and options - they're so very different
Derivatives return to favour as the market's volatility increases
Value makes a comeback and having no style's a winner

IRG See IRG research reports