The Press SATURDAY, MAY 6, 1961. Interest Rates And Local Body Loans

Press, Volume C, Issue 29506, 6 May 1961, Page 10

The Press SATURDAY, MAY 6, 1961. Interest Rates And Local Body Loans

The Government's decision to raise interest rates to 5 per cent, for longer-term stock in the new conversion loan realistically meets the market. Current yields on Government stock in dealings on the Stock Exchange are averaging a little more than 5 per cent The successful Government loan in the early months of this year offered 4} per cent, at an issue price of 99 per cent for the longer-term stock—an effective yield of about 4 7-8 per cent. Government stock has effective additional earning power to the small investor through the provision in Mr Nordmeyer's last Budget that exempts from income tax the first £3O of interest derived from Government stock. Thus, faced with three substantial conversion operations in the middle of this year the Government could virtually do no other than offer conversion terms at the ruling market rates for Government stock. At the same time, the Government’s action threatens to raise still more difficulties for local bodies raising loan money. Although the maximum rate for local body borrowing is raised to 5 per cent., this is hardly likely to be an effective remedy. What financial institution is likely to lend money to a local body at 5 per cent, when it can get as good, or better, terms for Government stock? The Government’s problem can be appreci-

ated; it is understandably anxious to have the bulk of the £56 million of loans maturing in June, July, and August converted to Government stock. No doubt it would be reluctant to let local body stock appear attractive to persons holding the maturing stock. But the Government cannot afford to let local body activity—much of it as important to the wellbeing of the country as State works—languish for want of loan money. The Government must surely be considering restoring part, if not the whole, of the J per cent, above Government rates local bodies were allowed to offer before Mr Nordmeyer’s last Budget halved that premium. Mr Nordmeyer did leave local bodies with a small inducement (1-8 pet cent.) above Government loans to offer investors; Mr Lake leaves them with no inducement to offer. Fortunately there is a clear indication that Mr Lake is concerned about this situation. In reply to a question by a reporter of “ The “Press” this week, he said he thought there should be “ a slight margin ” between terms offered for local body and Government loans. Mr Lake should not delay ending the present uncertainty, since potential investors in local body loans are unlikely to commit themselves when, on the Minister’s own showing, better interest rates than at present are in prospect.