HIGHER BANK RATE.

Auckland Star, Volume LX, Issue 229, 27 September 1929, Page 5

HIGHER BANK RATE.

TENDS TO LOWER PRICES. EFFECT ON" N.Z. EXPORTS. DE. NEALE EXPLAINS. "A high rate like that, if continued, is likely to have a depressing effect on price levels," said Dr. E. P. Neale, secretary of the Auckland Chamber of Commerce, when asked this morning for an opinion on the effect the raising of the bank rate by the Bank of England from 51 to 01 per cent would have on New Zealand. "Students of the English money market," continued the doctor, "are all agreed that the normal effect of a rise in the rate of discount charged by the Bank of England is to cause a fall in prices. The first effect of raising the bank rate is to make the present price of all bills of exchange fall. A fall in the value of Stock Exchange securities also follows, because business men and others who require cash, and can secure it through discounting their bills only at heavy cost, are apt to be induced to sell their Stock Exchange securities instead. And if the rise in the bank rate is sufficiently prolonged the losses incurred in the discounting of bills, and the salo of securities, is sufficient to induce many business men to place stocks of goods on the market in greater volume and for more urgent sale than would otherwise have been the case.

"The fall in prices for commodities is then a normal result of the rise in the discount rate, if it be continued for a sufficient length of time. There is the further point that the raising of the discount rate is also inevitably followed by a curtailment of credit, and the shortage of currency thus brought about has a further effect tending to depress prices in London. Butter and Meat Prices. "I feel, therefore, that if the new rate of discount is maintained for any length of time, there will be a definite fall in the prices received for New Zealand's staple exports. Aa New Zealand's staple exports are suitable subjects for speculation, the chances are that the fall in the prices of such commodities will be greater than the fall in the price of manufactured goods which form the greater bulk of our imports. In my opinion, therefore, the effect is likely to be that a given volume of exports from New Zealand will, as a result of the permanent raising of the discount rate, be able to purchase a smaller amount of imported commodities than would have been the case had the discount remained at its previous level.

"There had been a feeling among students of the London money markets that before long a further rise in the Bank of England's rates would be necessitated with a view to checking the tendency manifest for some time for gold to leave Britain. The raising of the discount rate is the normal device adopted to check a gold drain. However much, therefore, the effects upon New Zealand are to be deplored, it must be realised that the Bank of England has held out as long as possible, and that the raising of the discount rate has only been effected when all other alternatives have been exhausted. The Bank of England directors have a world-wide reputation of soundness of judgment in such matters," concluded Dr. Neale.