Reserve Bank of Australia Annual Report – 1960 Monetary Policy

During 1958/59 it had appeared desirable for the central bank to encourage bank lending in order to provide some stimulus for continued balanced growth in the economy and, accordingly, its policy had been aimed at ensuring that any necessary expansion of bank lending was not inhibited by liquidity considerations. To this end, releases had been made from banks' Special Accounts to increase bank liquidity and, at June, 1959, the L.G.S. ratio of the major trading banks (the ratio of liquid assets plus Government securities to deposits) was at the relatively high level of slightly above 22 per cent. However, although new lending was at a high rate, bank advances outstanding did not rise over 1958/59, but fell by a net amount of nearly £30 million.

The economic outlook at the beginning of 1959/60 continued to be somewhat uncertain. There was still some unemployment and it was evident that a relatively large number of people, particularly young people leaving school, would join the work force during the course of the financial year. On the other hand, the effects of the overseas recession of the previous year were largely overcome and steady growth appeared to be continuing in the Australian economy. Wool prices had risen and, with the continuing high level of capital inflow, a balance in overseas receipts and payments for the financial year did not seem improbable, even allowing for a higher flow of imports. However, although there were factors likely to contribute to a rise in expenditure over 1959/60, the total strength of the expansionary influences was uncertain, and it was by no means sure that they would be enough to take up any likely slack in employment.

The Government budgeted for a cash deficit but on a smaller scale than in 1958/59 and it seemed appropriate, in the light of economic prospects generally, for the central bank to continue to provide in its monetary policy for some moderate expansion of advances. Such an increase could readily be accommodated within the existing high margin of liquidity held by banks, and central bank policy was directed towards avoiding any increase in bank liquidity. It was decided, therefore, to absorb into statutory reserves with the central bank at least any addition to bank liquid assets over 1959/60.

In accordance with this policy, calls were made to banks' Special Accounts in October and November, 1959. In December, the central bank announced that the trading banks had been asked to ensure that their lending policies were consistent with not more than a moderate expansion of bank credit over the financial year. While the allocation of advances continued to be determined by the banks themselves, they were asked to continue to refrain from granting advances for the extension of hire purchase and instalment selling. Banks were also asked to avoid giving any stimulus to speculative tendencies.

Until about the end of 1959, overall supply and demand, whilst both increasing, appeared to be rising at about the same rate and to be more or less in balance. However, it was then becoming more evident that demand was tending to increase more rapidly. In these circumstances, the central bank continued in the following months its policy of absorbing accretions to banks' liquid assets into statutory reserves.

The high rate of new lending in the closing months of 1958/59 continued into 1959/60 and, indeed, increased as the year progressed. Although it seemed clear fairly early in the financial year that the declining trend of advances apparent throughout 1958/59 had ceased and that some rise had begun, it was not until the final stages of the year that a strong rise in advances became clearly evident. In the last three months of the financial year advances rose by more than £80 million, bringing the total increase for the whole year to £100 million. This made the net growth of advances over the two years about £70 million, a rate of just under 4 per cent per annum.

A number of factors contributed to the higher rate of new lending and to the actual expansion of bank advances in 1959/60. These included the expanded working requirements of customers consequent upon the rising level of business activity, the financing of a greater flow of imports available following the relaxation of import restrictions, and the increased level of costs in the economy, as well as some carry-over from arrangements made during the previous period of easier credit conditions.

Towards the end of the financial year, with activity at very high levels, with no evidence of any slowing down of the rate of new lending by banks, and with an increase in advances over the year now substantially larger than had been contemplated earlier, banks were asked to review their lending policies and achieve an early and significant reduction in the aggregate rate of new lending. As the pressure for bank loans had developed over a wide field, restraint over the general range of lending was sought. The banks were asked to continue to refrain from granting advances for the extension of hire purchase and instalment selling, and the need was emphasised to avoid providing finance where it would contribute to speculative activities.

It is always difficult to assess the amount of bank credit which is needed to maintain balanced growth of the economy through changing conditions. This is particularly so during periods such as we have experienced over recent years, when there have been marked changes, largely associated with the development of new financial institutions, in the availability and use of finance from sources outside the banking system. It was mentioned in last year's Report that the decline in advances that year was probably associated with the direct financing of investment from abroad and the marked growth in direct capital raisings in the local market. During 1959/60, the inflow of capital from overseas and capital raisings on the local market were again high, and it would seem that the total finance available during the year from bank and non-bank sources was greater than that necessary to ensure the balanced growth and stability of the economy. So far as bank credit is concerned, regard must be had not only for the actual movement in bank advances but also for the rate of approval of new loans which, even though they may not be drawn, may be facilitating a higher level of expenditure than the actual level of outstanding advances might indicate. Nevertheless, the growing opportunities for raising funds outside the banking system tend to limit the effectiveness of central bank action directed at the banking system alone.

Bank liquid assets and Statutory Reserve Deposit Accounts

The major trading banks commenced 1959/60 with an aggregate L.G.S. ratio of slightly above 22 per cent, and the seasonal decline which usually occurs in the early months of the financial year did not take place. Instead, liquidity increased almost continuously and by October the L.G.S. ratio was close to 25 per cent. A first call to banks' Special Accounts of £15 million was made in October and a further call of £20 million was made in November, the two calls together representing just over 2 per cent of deposits.

The Special Account system was replaced by a system of Statutory Reserve Deposit Accounts on 14th January, 1960, in accordance with the provisions of the Banking Act 1959. The initial determination for the major trading banks of a Statutory Reserve Deposit ratio (the amount required to be held in Statutory Reserve Deposit Accounts expressed as a percentage of banks' “current level of Australian deposits”) was 16.5 per cent, which was approximately the percentage which the Special Account balances bore to deposits immediately before the changeover.

Bank liquidity continued seasonally high during the March quarter, with the L.G.S. ratio reaching a peak slightly below 26 per cent towards the end of January and remaining about 25 per cent until late in March. The Statutory Reserve Deposit ratio was raised to 17.5 per cent with effect from 10th February, requiring lodgment by the banks of a further £16.5 million. The ratio of 17.5 per cent continued unchanged over the remainder of the year. With deposits continuing to rise until March, banks had to lodge a further £8.5 million in Statutory Reserve Deposit Accounts during March and April, but the seasonal fall in deposits which followed resulted in repayments from Statutory Reserve Deposits during May and June of £9.6 million.

Bank Liquidity — Percentage of Deposits

The net result of action taken over the year was an increase in banks' statutory reserves of £53 million and a net fall in their L.G.S. assets of £39 million, including a fall of £33 million in banks' holdings of Government securities. At June, 1960, the aggregate L.G.S. ratio was 18 per cent, compared with 22 per cent a year earlier. In previous Reports mention has been made of the banks' agreement to observe at all times a minimum ratio of liquid assets plus Government securities to deposits. During the year, the agreed conventional minimum ratio was increased from 14 per cent to 16 per cent. The margin of free liquidity in the banks' hands, as measured by the difference between the actual level of the L.G.S. ratio and the conventional minimum of 16 per cent, was 2 per cent at the end of June, 1960. This was a substantial reduction compared with the margin of about 8 per cent in June, 1959. The severe narrowing of the margin reflected not only the direct effect on the banks' liquidity ratio of the increase in deposits arising from the growth in advances, but also the action taken by the Reserve Bank to indicate to the trading banks the need for them to restrain the strong upward trend in their lending. This pressure on liquidity involved some borrowing by banks from the Reserve Bank towards the close of the year. In addition to the decline in L.G.S. assets, banks' lodgments with authorised dealers in the short term money market fell by £5 million over the year, to about £19 million in June, 1960.

Bank deposits and advances

The net increase in advances over the year was £100 million compared with a net reduction of almost £30 million in 1958/59, most of the increase occurring in the last few months.

Trading bank deposits increased by £137 million over 1959/60 compared with an increase of £54 million in the previous year. Movements in the factors affecting deposits are shown in the following table. This table relates to the trading banks which are subject to the Commonwealth banking legislation and so does not agree exactly with the table on page 17, which includes State banks.

	£ million
International reserves	−4
Government cash position	+29
Other net changes in Reserve Bank Accounts	−21
Trading banks:
Advances	+100
Government and municipal securities	−33
Other factors (net)	+66
Movement in total deposits	+137

GOVERNMENT SECURITIES MARKET

The June, 1959, Loan Council meeting adopted a borrowing programme for 1959/60 for State works and housing of £220 million, £10 million above the previous year's programme. However, at that stage it was thought unlikely that the very buoyant loan raising experience of 1958/59 would be repeated. The year's new money raisings in Australia and abroad were estimated at £190 million, £19 million lower than the result for 1958/59.

While in the event the total raised was about the amount estimated, the contributions of domestic and overseas raisings were different from what was expected. The overseas raisings of £31 million in 1958/59 were thought unusually high, but an even larger figure of £43 million was achieved in 1959/60. These unexpectedly large overseas raisings compensated for the slower pace of the borrowing programme in Australia, which yielded £147 million, substantially below the £178 million for the previous year.

A useful contribution to local raisings came from net cash subscriptions to the issues of Special Bonds, which continued at a substantial rate; after offsetting redemptions of £3 million, £23 million was received from this source. In the main, however, domestic raisings came from the three cash loans issued during the year. The September loan produced £58 million, the February loan £40 million, and the May loan £22 million, a total of £120 million.

The maturing securities which were dealt with in September, 1959, and May, 1960, totalled £296 million. At the time of the Budget Speech for 1959/60, redemptions for the year were tentatively estimated at £70 million, and a little more than this amount was in fact redeemed. Here also, as in the field of cash raisings, Special Bonds made a material contribution to the Government's loan operations, the amount of conversions from the maturing conventional issues into Special Bonds being £11 million.

The total of Government debt outstanding in non-official hands increased during the year. Several major groups added to their holdings of securities. Savings banks increased their holdings significantly from funds accruing as a result of the record increase in depositors' balances. Short term money market dealers again increased their portfolios and holdings by this group at the end of the year totalled some £80 million. Life assurance companies increased their holdings slightly, but trading banks reduced their holdings, and holdings of Commonwealth Government securities (including Special Bonds) by all other non-official holders fell very slightly.

The liquidity of trading banks came under heavy pressure during the latter part of the year, and they were obliged to be net sellers of securities over the year. The Reserve Bank purchased some £30 million of securities as a result of these circumstances. However, in its open market operations with the remainder of the economy the Bank was a substantial net seller of securities.

The central bank's transactions over the previous five years in Government funded debt repayable in Australia had resulted in some small increase in its portfolio. Net purchases of about £30 million a year were made in 1954/55 and 1955/56, but net sales in 1956/57 of approximately £20 million were almost equalled by net purchases in 1957/58. About £40 million of net sales were effected in 1958/59.

The on ’change bond market showed strength in the first half of 1959/60 with yields tending to fall, but towards the end of the March quarter there was some rise in yields and by June, 1960, yields were generally higher than those obtaining a year earlier. The increase over the year in yields on short and medium term securities was of the order of ⅛ per cent but the average yield on securities 10 years and over increased only slightly.

The long term securities offered in new loans during the year continued to carry a 5 per cent coupon at par and the currency of the issues was little changed. However, the yields offered with short and medium term issues in the May loan were higher than in the earlier operations.

Interest rates on new public issues of local and semi-governmental loans remained at £5/5/– and £5/7/6 per cent. Market redemption yields on medium term securities in this field were much the same as in the previous year.

A new form of Government borrowing was introduced in November, 1959, with the issue of seasonal securities. These securities had a currency of three months, and were issued fortnightly during the period when liquidity was rising seasonally, with the aim of offsetting part of the increase. The issue was terminated for the year towards the end of March, 1960, after ten issues had been made, attracting subscriptions of £68 million. The securities were completely repaid before the end of the financial year, the maximum outstanding at any time being £45 million. The first six issues were offered at a price equivalent to a discount rate of £3/–/2 per cent, but against a background of a general increase in short term yields the issue price was reduced in February to give a discount rate of £3/2/2 per cent.

SHORT TERM MONEY MARKET

It was as recently as February, 1959, that the Bank first provided lender of last resort facilities for authorised dealers in the short term money market. These facilities were extended against the background of an already existing unofficial market of appreciable size. The aims were mainly to contribute to the soundness of what was becoming a significant investment medium for holders of substantial amounts of short term funds, and to assist in the development of a wider and more active market for short term Government securities.

The arrangements are that the official money market dealers accept loans of amounts of £25,000 or more, up to limits approved by the Bank, either at call, at notice, or for fixed periods. They invest these funds in authorised “money market securities”, which for the time being are Commonwealth Government securities with currencies not exceeding three years. Dealers also buy and sell money market securities in parcels of £50,000 and over.

The growth of the official market during the year was evident in the emergence of additional dealers and in its increasing size. Two new dealers joined the panel, bringing the total number to seven, and funds placed with the dealers increased by some £28 million over the year. A peak figure of £81 million was recorded at the beginning of June, 1960, and funds with dealers at the close of the financial year totalled £77 million. The dealers also handled a substantial volume of transactions in money market securities, including the new seasonal securities.

While the market's growth in 1959/60 was not as rapid as in the earlier period, it was accompanied by a distinct widening of the dealers' range of contacts. This has increased the market's capacity to search out and absorb liquid funds available in the economy and has brought it greater flexibility in meeting changing conditions.

The first few months of the market's life included the period of the year when there is usually a general shortage of liquidity. However, certain exceptional factors operated in that year to ease the normal stringency of funds. These favourable conditions did not persist in 1959/60, and in the June quarter the market experienced the most difficult period it has yet had to face. Over these months, Government receipts were, as is usual at that time, greater than its expenditure, and there was also other seasonal pressure on liquidity. Under these pressures the market found itself short of funds from time to time and some dealers had marginal recourse for loans from the Bank as lender of last resort.

Short Term Money Market — Minimum and Maximum Rates on Loans Accepted

Market conditions were reflected in the rates paid by dealers during the year. At the end of June, 1959, these had ranged from a minimum of £3/–/– per cent for call money, to a maximum of £3/10/– per cent for money placed for fixed periods. As funds became more readily available dealers were able to reduce their rates until towards the end of January, 1960, a call rate of £2/8/9 per cent was recorded. However, rates generally then moved upwards and at the end of the financial year were again ranging from £3/–/– per cent to £3/10/– per cent.

The year saw the short term money market establish itself more firmly as an integral part of the Australian financial scene, and its usefulness to lenders became even more generally accepted. Although the market also offers opportunities of extending somewhat the Bank's scope for open market operations, further time is needed for a firm appraisal of eventual possibilities in this field.

EXCHANGE CONTROL

The influence of changing conditions, both locally and overseas, has been very apparent in the administration of Exchange Control.

With the gradual improvement in the payments situation of the sterling area as a whole and the continued strength of sterling in relation to other international currencies, it had been possible in December, 1958, for the United Kingdom to move to a position where sterling was, by rule, freely convertible on non-resident account in respect of current transactions.

In the light of these changes, Australia had been able to announce in January, 1959, the abolition of the distinction between the dollar area and the non-dollar non-sterling area, so far as Exchange Control was concerned. Moreover, the level of Australia's own international reserves at that time was such that it then became possible to administer Exchange Control on the basis of the Australian pound also being convertible in the hands of non-residents for all current and most capital transactions. However, there still remained some categories of overseas payments on resident account where separate limits had been retained for the sterling and the non-sterling (External Account) areas respectively.

In November, 1959, it was decided that these categories could be placed on a world-wide basis; accordingly, the separate limits were dispensed with. At the same time, policy was varied so that Australian residents may now obtain foreign currency to the full extent of their bona fide needs for travelling expenses and other purposes not of a capital nature. In addition, substantial increases were made in the authority of the Australian trading banks to approve, without reference to the Exchange Control, the provision of foreign currency to Australian residents. These banks have had for some time authority to sell foreign currency due to overseas residents in respect of current payments.

Thus, it has been possible for Australia to move in harmony with the world-wide trend of progressively removing restrictions on international payments and, at the present time, no restriction on current payments remains. The Exchange Control now functions as an instrument for controlling capital movements.

As stated in last year's Report, the repatriation of capital by overseas residents is normally permitted. Although advance commitments are not entered into, approval would be withheld only in cases where the circumstances were exceptional. This is in accordance with the Government's expressed policy of continuing to encourage overseas investment in Australia, particularly where such investment is of a kind likely to help in the balanced development of Australia's resources and brings with it the skills and “know-how” needed for the successful fulfilment of the project in which the investment is made. In stating its policy the Government has made it clear that although no rules are laid down, it is generally considered desirable that overseas investment is accompanied by Australian participation in ownership and management.

Mainly because of Australia's internal financial needs for development purposes and her position as a net importer of capital, Australian residents are permitted to transfer capital abroad only in a limited range of circumstances. As a corollary to this policy, a strict accounting for all foreign currency proceeds of exports is still required and broad supervision is maintained over outward payments.

It was also possible during the year to give some relief from detailed Exchange Control procedural requirements; for example, a large number of import payment transactions may now be undertaken without the need for the completion of Exchange Control forms. In addition, certain amendments were made to the Exchange Control regulations, the most significant being that Australian residents are no longer obliged to offer to sell to the Reserve Bank or to an agent of the Bank certain U.S. dollar securities. However, the obligation to furnish returns in respect of certain foreign security holdings, and to obtain the authority of the Reserve Bank before dealing in such securities, still remains.

FOREIGN EXCHANGE

The Reserve Bank's foreign exchange operations stem largely from the arrangements whereby Australia's foreign exchange earnings are mobilized. Under these arrangements, banks settle with the Reserve Bank at regular intervals in respect of their net receipts or payments position in all foreign currencies except U.S. and Canadian dollars. Such settlements are effected through sterling and total transactions in 1959/60 amounted to £Eng. 202 million, compared with £Eng. 194 million during the previous year.

A market is also provided by the Reserve Bank in which the banks may deal in U.S. and Canadian dollars. Dollar transactions, spot and forward, with banks in Australia during the year totalled the equivalent of U.S. $291 million.

A large number of remittances, involving the equivalent of £Eng. 59 million, was made to various countries during the year for the Commonwealth and State governments. The Bank also purchased from the Commonwealth Government the foreign currency proceeds of loans raised in the United States and Switzerland.