INTEREST RATES

Dominion, Volume 28, Issue 81, 29 December 1934, Page 14

INTEREST RATES

Reduction in Australia TRADING BANKS’ POSITION It is not surprising that the trading bauks have declined to’ follow the Commonwealth Bank in its further reduction of interest rates on fixed deposits, says the Melbourne “Argus.” The reductions affect only the shorter-term money, the new rates being 5/- per cent, for money lodged for three months (1 per cent, per annum) and 15/- per cent, for money lodged for six months (1J per cent, petannum). The rate for 12 months (2i per cent.) and the rate for 24 months (2} per dent, per annum) remain unaltered. , Although the trading banks prefer the longer-term deposits as making for stability, there is a very large average volume of this short-term money always available, which the banks find very useful for their purposes. Some of this money belongs to overseas companies with Australian branches which have left it in Australia owing to the high adverse exchange rate. A further reduction in the interest earnings might result in the withdrawal of these funds from Australia Although action by the Commonwealth Bank, functioning as a central bank, in reducing interest rates, is significant to the money market, the trading banks have even a more widespread responsibility. Fixed deposits in the Commonwealth Bank amount to approximately £31,000,000, whereas the fixed deposits in the trading banks total more than £192,000,000 A general all-round reduction or interest rates on fixed deposits in the trading banks therefore would affect a vastlv greater number of depositors. Many people depend upon interest from fixed deposits as portion of their income, and as bank interest rates to-day are less than, half what they were two years ago, they have already been called upon to make the severe sacrifice of more than 50 per cent. , ~ „ Opinion is divided on the question whether interest rates have reached bedrock. The banks think that they have, but other financial authorities look for still lower levels. It is significant that gilt-edged securities on the Australian stock exchanges arc casing in price, and that interest yields from them are consequently rising. The average return of the 4 per cent, issues on prices last week rose to £3/6/1 per cent., which already is attractive Compared with bank interest rates, without the .reduction. To bring the trading bank rates.down might cause deposits to be withdrawn and invested in Commonwealth securities.