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Interest rates



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TREASURER

EMBARGO

N O . /S3

2.\2.V>

STATEMENT BY THE TREASURER, THE HON JOHN HOWARD," MP . . .

INTEREST RATES . . . .. . ■

Mr Deputy Speaker, I would like to inform the House of a number

of decisions that have been taken by the Government regarding

interest rates affecting certain loans charged by trading and

savings banks in Australia. , . . ’

The Government has concurred in a proposal to increase the ceiling

for overdrafts drawn to a limit of $100,000 by an amount of 2 per

cent. · .

Secondly, the Government has approved an increase of one per cent

in the lending rate-charged by savings banks for loans of under

$100,000 for owner-occupied housing. .

Thirdly, the Government has decided to concur in the complete

abolition of controls on deposit rates in respect of both

savings and trading banks. It is proposed to put to the Loan

Council certain matters relating to the adjustment of the rate .

of interest charged on Australian Savings Bonds, and it is quite

clear that that particular instrument is at present not attracting

a reasonable share of funds from the "household sector.

In the meantime, sales of the present series of ASB's - Series No 17

will be terminated as'from tonight. . · '

'it is proposed on the basis of an understanding with the banks that

the increase in the overdraft rate of 2 per cent will not apply for .

the duration of the drought to those people affected by the drought,

and I will have something further to say by way of'more precise

definition regarding that tomorrow. . .

It is also proposed, Mr Deputy Speaker, to approach the Loan Council ' . ' . Z . '

for approval to increase the borrowing capacity of the Commonwealth

Development Bank from the existing amount of $20.million1to.$40 million

I should say two things by way of general observation, Mr Deputy

Speaker. First, it has become apparent that interest rate controls,

which were designed primarily to assist small borrowers, are in fact,

because of increases which have occurred in other interest rates,

having a counter-productive effect. Evidence has also emerged that

far from these, controls effectively assisting small borrowers, they

have resulted in many small borrowers being denied access to funds

at concessional rates, and those small borrowers are, in fact,

being forced into higher lending areas. Indeed, if the gentlemen

sitting, opposite tonight don't take my word on that subject, I

invite their attention to the words of Senator Walsh, the Opposition

Spokesman on Primary Industry and Finance who at least once or

twice last week in another place argued that very precisely the thing

that I have just said is indeed happening.

I should secondly make it clear, Mr Deputy Speaker, that as "I have

previously indicated, and I repeat here tonight, the question of

whether controls should remain on interest.rates charged by banks

or indeed by any other institution in Australia, is a matter which

properly should be addressed by the Campbell Committee when it

reports. This is because interest rate controls are only one. part

of a ■series of controls that exist upon banks in Australia,

arid it is appropriate that all of those controls be looked at together.

In the meantime, this increase in the ceiling of 2 per cent will of

course give to the trading banks considerably more - flexibility, a

greater capacity to offer a variety of interest rates so far as

prospective borrowers are concerned. It should not be seen as a carte

blanche for a general increase up to the ceiling of 2 per cent, but

we would hope that the additional flexibility is used by the trading

banks, in a proper and sensible, and I know it will be, in a responsible

manner. The question of the future of interest rate controls as such

can be looked at in the context of the Campbell Report when; it comes

down during the course of next year. . '

May I simply conclude, Mr Deputy Speaker, by saying one other thing,

and that is this, that since the time of its election in 1975 this

Government'has placed very considerable importance upon the effective .

use of monetary policy as a means of achieving its anti-inflationary

objectives. · . ' . . .

As I said in the House last week, and repeated this morning, it is

possible for a Government to either control the money supply or to .

control interest.rates, but really not both of them at the same time.

The Government has chosen a course of monetary responsibility, in the

decisions that have been announced tonight.

In reality, we are also recognising what is increasingly becoming

apparent, and that is that the interest rate controls at their existing

ceilings, are in fact, not helping the people they are designed to help,

and that is the small borrowers, and it is of little comfort to a small

borrower to be told - if we could give you the loan , you could '

have it at 10^ per cent - when .in reality the loan is not being

available because that interest rate is way out of line with the interes

rate which is an interest rate .reflecting market realities, and

this particular decision should be seen very much in the context

of recognising that particular reality.

No Governmentincluding this Government, welcomes increases in

interest rates so far as they affect either people buying or wanting

to buy their homes or affecting the operations of^ small business. .

Because there are certain, market realities that have to be faced,

Governments that pretend that you can achieve the utopia of un-‘

realistically.low interest rates and firm monetary policy, Only

in the long run bring" much greater economic chaos to the people

they are elected to serve and in the long run, produce much .

higher inflation and much higher interest rates. .

1 commend, the statement to the House. . .

2 December, 1980 . . . ' ' .