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Friday, 16 December 1983
Page: 4017

Question No. 215

Senator Childs asked the Minister representing the Treasurer, upon notice, on 26 May 1983:

(1) Did the Treasurer say in his economic statement of 19 May 1983 that monetary growth at 12 per cent 'is not consistent with this Government's objectives'.

(2) What was the rate of growth in M1 and M3 in the year to March 1983 and did the rate of growth in M3 exceed that of M1.

(3) Does M3 include bank deposits on which market rates of interest are paid and does this not mean that banks can offer high interest rates when liquidity is tight so as to offset Government's attempt to control the money supply with open market operations.

(4) Is M1 a better measure of the tightness of liquidity.

(5) What was the real rate of growth in M1 in the year to March 1983.

Senator Walsh —The Treasurer has provided the following answer to the honourable senator's question:

(1) Yes.

(2) The growth rates of M1 and M3 in the twelve months to March 1983 were 1.8 per cent and 12.4 per cent respectively.

(3) The volume of money measure M3 includes trading bank fixed deposits and certificates of deposit as well as savings bank investment accounts and statement savings accounts on which market or near-market interest rates are paid. Open market operations involving the sale of additional Commonwealth Government securities to the non-bank sector by the Reserve Bank have the effect of reducing the overall volume of funds available to the banking system as deposits.

One response of the banks to such operations could be an increase in their deposit rates designed to limit their loss of deposits. However, such action by itself is unlikely to offset fully the lower deposit growth resulting from the open market operations. This is because the increase in bank deposit rates will need to be reflected in bank lending rates and, as these increase, it is reasonable to expect that there will be an increasing reluctance by borrowers from banks to pay the higher interest rates. Faced with the consequent fall-off in demand for borrowings, the banks' ability to offer higher interest rates will be necessarily inhibited and, hence, so will be the banks' ability to offset fully the open market operations.

(4) No single measure is adequate on its own for measuring the liquidity of the financial system. An accurate assessment of monetary and liquidity conditions can only be reached after considering a wide range of financial indicators. For example, the M1 aggregate needs to be interpreted with particular caution at present since the relatively high nominal interest rates on most interest bearing bank deposits and other financial assets have resulted in individuals economising on balances held in cheque accounts. As these cheque accounts are included in M1, this aggregate has therefore grown more slowly recently than most other financial aggregates and accordingly does not reflect the easier liquidity conditions more generally.

All measures of monetary and liquidity conditions-including M3-are subject to a variety of structural and cyclical influences that must be taken into account in assessing their effectiveness in portraying monetary conditions. The choice of one monetary aggregate over another as a better measure of monetary conditions must ultimately reflect a judgment as to the relative disadvantages and advantages of each aggregate. In this regard, M3 appears to be more representative of general monetary conditions, less susceptible to short-term volatility and has a greater level of community understanding than M1. It is considered a more appropriate summary measure of monetary conditions.

(5) Real growth rates of monetary and other aggregates are dependent on the choice of the price deflator used in the calculation. Based on movements in the Consumer Price Index, the real movement of M1 in the twelve months to March 1983 was minus 8.7 per cent.