WELLINGTON NEWS

Hokitika Guardian, 29 April 1927, Page 1

WELLINGTON NEWS

LOWER BANK RATE. (Special to “ Guardian.”) WELLINGTON, April 20. The Bank of England discount rate has been reduced from 5 to 4) per cent, ami the announcement was received on tho London Stock Exchange with cheers. One can welt imagine the welcome that greeted the cheapening of money for the 5 per cent, bank rate was maintained since December Jrd. 1925, until Thursday of last week, a matter of over 500 days. It is interesting to examine the factors which make for the raising and lowering of the Bank rate. The Bank of England controls the currency of the country, although during the war and since Treasury notes have been in circulation. but these notes are to be placed under the control of tho Bank of England presently. The Bank lias the right of note issue, and under the Bank Act, 1814. it may issue notes against Government. sccurites to the amount of £19.750,0H0 above that the issue must be against gold. That is for -'‘.very £5 note issued above the amount must be represented by five gold sovereigns or the equivalent in bullion. The Bank can hold a certain amount of silver, but this right, lias not been exercised for half a century. The Bank is also under statutory obligation to buy and sell gold. When tho gold reserve increases, the proportion of reserve fo liabilities tends to expand. The Bank rate largely depends upon the gold reserves. The gold reserve is diminished by the payment: of British liabilities abroad and replenished by payments made to Britain. The position which may be existing from time to time as regards the immediate balance of debt to be settled abroad is reflected in the exchanges. and it may be observed tliat the Bill on London is still (bo world’s i nioriiational currency.

. The general position is disclosed by the amount and the ratio of the reserve. When gold is being exported freely the Bank rate is advanced and this lias the effect of checking the outflow of gold and secondly it attracts foreign money for employment in Britain. When gold is pouring into the Bank and the ratio of reserve to liabilities expands, a lowering of tho Bank rate provides Die correct ion. Cheap money creates a demand and borrowers from abroad come in and gold is likely to again flow out in some volume Of course political events affect tho situation also. Tf the gold movements are examined it will be found that during the first week in January the gold reserve of the Bank totalled £150.110.000, in tin- first week in February it amounted to £149.752.000, the first week in March to £145.772.000 and in the first week in April to £l-19,812,009. On April Ifitli. the gold reserve stood at £ 151.581,000 and last week it. was £152,244.000. Thus in the past fortnight there was an increase of £2.432.000 in the amount of the yellow metal, and this is only about two millions less than the amount held in April. 1925. when a special effort was made to accumulate gold in preparation for the resumption. of the gold standard. The proportion of reserve to liabilities last week was 29.10 per cent, as compared with 24.70 per rent, a fortnight earlier.

Tt will he noted that the reduction in the Bank rate is A per cent. This represents the usual caution of the Governor and Court of 1 lie Bank of England. The rate is generally advanced 1 per cent at each move and reduced •}. per cent. From the improvements shown in last week’s gold reserves and proportion of reserve <• liabilities it is possible that there will he a further reduction in the rate to ■I per rent., hut it is not likely to go hclow that rate, for some time, and much will depend upon the recuperation shown hy Continental Europe. The open market rate responded promptly for three months’ hills were quoted at 3 and 3-Bths. last week against 4J. per cent, in the week previous and short loans were done at 3.V per cent, against -t per cent. The lowering of the Bank rate moans the cheapening of money all round, for the trading hanks must lower their rates both for deposits and overdrafts, and this must prove helpful to trade and commerce of the United Kingdom. The reduction will also have a favourable effect in Europe and the United States. There are already expectations in New York that the rediscount rate of the Federal Reserve Bank which now stands at 4 per rent, will he reduced. That New A r ork must follow London in tins matter is some evidence that London is still the monetary centre of the world. The cheapening of money in London is rather advantageous for us, because the New Zealand Government must go upon the London market very soon for' a- loan of five or six millions.