Reserve Bank of Australia Annual Report – 1967 Economic Developments and Monetary Policy

Demand

Aggregate domestic expenditure, which had tended to level out in the middle of 1965/66, resumed a moderate upward trend in the final quarter of that year and this continued during the first half of 1966/67. Subsequently, the rate of growth became more pronounced and for the year as a whole expenditure rose by over 7 per cent. In 1965/66 the increase had been about 5 per cent.

In addition to this faster growth in expenditure the composition of aggregate spending continued to change, as in previous years, and for the fourth year in succession public spending increased faster than private expenditure. Personal consumption expenditure increased more rapidly as the year progressed. Private investment expenditure (excluding farm stocks), however, has been the most volatile component of expenditure in recent years—as can be seen in graph 4—and changes in the rate of growth of aggregate expenditure have reflected to a considerable extent changes in private investment. This component of expenditure fell sharply in the final half of 1965/66 and fully offset an increase in personal consumption and public expenditure. Private investment remained at a fairly steady level throughout 1966/67, although there were signs that an upward trend was emerging during the closing months of the year.

Graph 4

Gross National Expenditure/Change

Contribution of Components

For the year as a whole, private investment expenditure made a demand on resources smaller than in 1965/66. On the other hand, the increase in personal consumption over the year represented about a 4 per cent increase in total spending compared with slightly over 3 per cent in 1965/66. Public spending, which now represents almost 22 per cent of total expenditure, compared with a little less than 19 per cent in 1962/63, was directly responsible for an increase of about 2 per cent in total spending. The corresponding figure was slightly larger in 1965/66.

Public Expenditure

In aggregate, public expenditure on goods and services increased at a slightly slower rate in 1966/67 than it had in the preceding year. On a budgetary basis, Commonwealth defence expenditure increased faster than in 1965/66. A large proportion of this increase represented pre- and post-payments for defence goods and did not give rise to a flow of goods and services during the year; the increase during the year in defence expenditure, excluding these payments, was well below that recorded in 1965/66. However, the increase in expenditure by the Commonwealth Government for other purposes was significantly more rapid and, in total, Commonwealth demand for goods and services increased at a rate which was only slightly slower than in the previous year. State expenditure increased by slightly less than the 10 per cent recorded in each of the previous three years. Public authority transfer payments continued to increase but at a slower rate than in 1965/66.

Graph 5/6

Personal Consumption/Change

Contribution of Components

Private Investment Expenditure

(Seasonally Adjusted)

Consumption

During the early months of 1966/67 personal consumption rose at about the same rate as in 1965/66 but subsequently some acceleration occurred. A significant part of this increase, as is shown in graph 5, was associated with increased expenditure on durable consumer goods (particularly motor vehicles); this category of spending had fallen during the first half of 1965/66 and risen only moderately in the following twelve months. Expenditure on non-durable goods also accelerated as the year progressed, while expenditure on services, a steadily rising component of consumption, rose throughout the year at a rate of almost 8 per cent per annum.

The increase in consumption, however, did not keep pace with the growth in personal income. This was partly explained by taxes continuing to take an increasing proportion of income, although the rise was not as strong as in the previous year when tax rates were increased. Farm income represented a higher proportion of total personal income than in 1965/66 and this would also have had an impact. A further constraint on the growth in consumption may have arisen from the fact that contractual obligations, such as loan repayments and net contributions to life and pension funds, have in recent years reached a level which represents a significant proportion of personal disposable income. In addition to these general factors, the relatively slow growth in consumption of durable goods is possibly also reflecting a situation in which most of the major durable consumer goods have reached a high level of market penetration.

Private Investment Expenditure

Private investment (excluding farm stocks), which reached a peak early in 1965/66, followed a downward trend throughout most of that year and in the first half of 1966/67. It has subsequently tended to rise moderately. Unlike the 1960/61 downswing, preceding which all major components of private investment expenditure had reached a peak at about the same time, the latest decline represented, as can be seen in graph 6, the net result of divergent movements in various categories.

Private dwelling expenditure and non-farm stock accumulation both reached a peak about the end of 1964/65 and subsequently declined while non-dwelling fixed capital expenditure continued to increase fairly rapidly until the March quarter 1966 after which the movements reversed. Dwelling expenditure and non-farm stock accumulation have since resumed an upward trend while non-dwelling fixed investment has been following a downward trend, although a trough may have been reached during the final months of the year.

The rise in private dwelling expenditure was preceded by an upturn in loan approvals and commencements. Loans approved for both new and used dwellings by the major lending institutions increased sharply during the first half of 1965/66 following the Reserve Bank's request to banks for a higher level of lending for housing. Lending for new dwellings levelled out early in 1966/67. Lending for used housing continued to increase for most of 1966/67.

During 1966/67 as a whole, the number of loans approved for new housing was about 3 per cent higher than in the previous year. Since the average value of loans was also higher, the amount of finance approved increased by about 7 per cent. The value of loans approved for the purchase of previously occupied dwellings, however, increased by around 16 per cent. To a large extent, these increases in loan approvals were made by the banking system although lending by permanent building societies continued to follow a strong upward trend. Lending by most other institutions remained at about the same level as in 1965/66 while, as had been foreshadowed in the 1966/67 Budget, there was less finance provided by the War Service Homes Division. Both institutional and non-institutional finance appears to have been readily available throughout the year but, because of the cost, some homeseekers were reluctant to use the latter. During the year loans insured by the Housing Loans Insurance Corporation increased rapidly and at the end of June amounted to almost $45 million. Twelve months earlier they had been only $6 million. A large proportion of these loans insured related to loans made by building societies but banks also made a significant number of loans under these arrangements. The higher level of finance being provided for used housing is likely to have added indirectly to demand for new dwellings because funds obtained from the sale of a dwelling are frequently used to obtain new accommodation.

The upswing in private dwelling commencements (see graph 7) during the second half of 1965/66 was largely confined to houses since there was, at the time, a large number of unsold multi-unit dwellings on the market. The rise was, however, only short lived and house commencements remained fairly steady throughout 1966/67 at an annual rate of about 68,000. Private flat commencements remained at a fairly steady level through-out 1965/66 and the first quarter of 1966/67. A sharp rise occurred in the December quarter 1966 and flat commencements then remained at about this higher level during the second half of the year. Private dwelling commencements were close to 98,000 for the year as a whole, compared with 92,000 in 1965/66. Government dwelling commencements increased over the year from 15,000 to 17,000.

With finance approvals and local government approvals tending to remain fairly steady in the closing months of 1966/67 it seems that dwelling commencements could remain at about an annual rate of 115,000 in the early months of 1967/68.

Graph 7

Dwelling Activity

Non-dwelling private fixed capital expenditure was a strong expansionary force until about the middle of 1965/66. However, this category of spending had run well ahead of final demand during the preceding twelve months and the sub-sequent decline was not unexpected. Much of the excess capacity that resulted appears to have been eliminated during 1966/67 and the downward trend in expenditure was halted. The Chambers of Manufactures/Bank of New South Wales Survey indicates that, in the manufacturing sector at least, the proportion of firms working at what they regarded as a satisfactory rate reached a trough around the September quarter 1966 and has since risen.

Graph 8

Demand, Stocks and Imports

The decline in capital expenditure occurred over a wide area of industry. Thus during the first half of 1966/67 expenditure by most major manufacturing industries and a number of non-manufacturing industries was lower than in the preceding half-year. Exceptions were engineering and metals, and commerce where the rise in expenditure continued and the mining industry where expenditure levelled out. In the second half of the year, the decline in expenditure was arrested in a number of industries including motor vehicles, paper and transport but continued in others. Investment by the mining industry again showed little change.

Non-residential building expenditure reached a peak in the final quarter of 1965/66. Commencements had started to follow a downward trend earlier but activity had been sustained by the high value of work under construction. This did not reach a peak until the end of 1965. Expenditure followed a downward trend during the first half of 1966/67 but this was halted in the second half of the year. Construction of most types of business premises appeared to have declined but the most pronounced falls were in shops, office buildings and factories. Construction of premises for non-business purposes on the other hand tended to rise moderately.

Expenditure on plant and equipment reached a peak early in 1966 and tended to fall throughout the remainder of that year. This fall was reflected in a decline in both domestic production of machinery and imports of capital equipment. During the first half of 1967 this category of spending seems to have levelled out.

Non-farm stocks increased only moderately throughout 1966. This period of modest growth resulted in stocks, which previously had been excessive, returning to apparently more comfortable levels. Consequently, during the second half of the financial year, with final expenditures continuing to increase—in fact, at a faster rate than previously—there was a more pronounced rise in non-farm stocks. Despite this, the ratio of non-farm stocks to gross national expenditure fell over the year. It appears that excess stocks are not eliminated, to any significant extent, until expenditure is following an upward trend. Thus, as can be seen in graph 8, in the past eight years there have been three peaks in the ratio of non-farm stocks to gross national expenditure—June 1961, June 1963 and March 1966. These have all coincided with a trough in expenditure and as expenditure has recovered the ratio has declined. On the other hand rises in this ratio, indicating rapidly rising stocks, have preceded, and probably have contributed to each decline in aggregate spending since 1959/60.

Stocks held by all major non-rural industries increased only moderately during the first half of 1966/67 except in the motor vehicle industry where they fell after production had been reduced. During the March quarter, stocks held by the manufacturing and commerce industries both rose more rapidly.

Exports of Goods and Services

Commodity prices eased and the rate of growth of world trade slackened during the first half of 1966/67 when there was a marked decline in the rate of increase of activity in most major industrial countries apart from Japan, France and Italy. This slower rate of growth was primarily the result of a number of countries having approached the limits of their productive capacities; the implementation of economic policies designed to curb excess demand pressure also played a part. The slower growth in activity and world trade continued during the second half of 1966/67 and there was no significant change in commodity prices.

Despite this general hesitancy in world demand Australian exports of goods and services increased strongly during 1966/67 after having remained fairly steady during the previous year. Over the year as a whole, exports amounted to $3,472 million (compared with $3,136 million in 1965/66) but at the end of the year they were running at an annual rate considerably greater than this. Higher wheat exports accounted for about one-third of the increase in total exports while there were also sharp increases in exports of iron ore, iron and steel, machinery and transport equipment, coal, petroleum and petroleum products. With only a small quantity of wheat available for sale because of the drought in 1965/66, wheat exports were fairly low during the early months of 1966/67. However, as the new crop was harvested exports accelerated and remained at a very high level throughout the second half of the year; China purchased 30 per cent of the wheat exported and Pakistan, India, United Kingdom and Japan were also major buyers. Iron ore became a significant export for the first time during 1966/67 when ore valued at about $46 million was exported—exports in 1965/66 had been valued at only $3 million and most of this was in the latter part of the year. On the other hand, exports of iron and steel declined in the second half of the year after having risen sharply in the first half. The quantity of wool exported in 1966/67 was a little higher than in 1965/66 and the value of exports rose by about $23 million. The average auction price was lower than in 1965/66; prices tended to fall during the first half of the year and then levelled out.

Supplies

Production

During the first half of 1966/67, when expenditure was increasing only relatively slowly and stock levels were being reduced, manufacturing production remained at a fairly steady rate. Subsequently, with final expenditures rising more rapidly and a resumption of stock formation, production again began to follow an upward trend. During the six months to December, production of most categories of durable goods and metals increased but output of transport equipment and textiles declined. The subsequent increase in manufacturing production was shared by almost every major industry. The only significant exception was the building materials industry.

The severe drought in N.S.W. and Queensland was broken during the year and, as a result, the volume of rural output was some 15 per cent higher than the 1965/66 level and about 5 per cent higher than in 1964/65. The most sub-stantial increase was in wheat production which amounted to about 460 million bushels which was some 200 million bushels higher than production in 1965/66 when the crop suffered from the drought conditions. The 1966/67 harvest was also well above the previous record of 369 million bushels produced in 1964/65. Wool production, at 1,759 million lbs, was almost 6 per cent higher than in the previous year; the number of sheep shorn was about the same as in 1965/66 following the drought in that year but average clip per head was considerably higher because of the more favourable climatic conditions. Output of both sugar and cereal grains increased substantially during the year while there was also an increase in dairy production. On the other hand, sheep and cattle slaughterings were a little lower as a result of the depletion of stock numbers during the drought, coupled with a strong demand for animals for restocking following the drought-breaking rains.

Little precise statistical information is available on the output of the tertiary sector of the economy. The indirect measures available suggest that, in aggregate, tertiary production continued to rise during 1966/67 at much the same rate as in 1965/66.

Employment

As a consequence of the relatively slow growth in expenditure and production in 1965/66 and the initial period of 1966/67 civilian employment and non-farm output per head increased only modestly. During the nine months to March 1967 civilian employment increased at an annual rate of only about 2 per cent—it had increased by 2.8 per cent in the twelve months to June 1966 and by 4.1 per cent between June 1964 and June 1965. During this period, employment in the building and construction sector actually declined while employment in the manufacturing and commerce sectors, the two largest employers of labour, continued to increase at a slow rate. Employment in the remaining sectors continued to rise fairly steadily. These changes are shown in graph 9.

Employment responded to the earlier increase in production during the final quarter of the year but the increase over the full year was only about 2.3 per cent. Most categories of employment shared in the more rapid increase during the June quarter. When the year ended, employment in all major industrial sectors was following an upward trend. Defence forces continued to increase at about the same rate as in 1965/66, a considerably higher rate than in earlier years.

The increase in employment over the year was not quite sufficient to absorb all the increase in the workforce. Persons actually registered for employment rose by about 10,000. Over 1965/66 there had been a rise of some 17,000. During 1966/67, the workforce increased by considerably less than in the previous year. It seems that net migration was about the same as in the previous year but there was a significantly smaller number of school leavers seeking work. In particular, the operation of the Wyndham scheme in N.S.W. meant that a considerable number of students remained at school for an additional year and in Western Australia the minimum school leaving age was increased. Under normal circumstances a significant proportion of these students would have entered the workforce during the year.

During most of the year persons registered for employment varied little more than seasonally after continuing to follow an upward trend during the first two or three months of the year. Unemployment then fluctuated around a fairly steady level until the final months of the year when a further rise occurred.

At the end of the year persons registered for employment represented about 1.4 per cent of the workforce. The impact of the reduced number of school leavers was reflected in the unemployment statistics and New South Wales and Western Australia were the only States in which persons registered for employment fell, on a seasonally adjusted basis, between November and February. On an occupational basis, the rise of applicants over the year appears to have been mainly in the commercial and clerical, and semiskilled and unskilled categories.

Cyclical fluctuations in production affect not only the level of employment but also overtime worked and productivity since, to some extent, firms are prepared to maintain their labour force when they believe falls in their current production levels are only temporary.

Average hours of overtime worked in the manufacturing sector appear to have reached a trough in the first quarter of 1966, as did manufacturing production. A modest increase in overtime has since been recorded although there has only been a small increase since the end of 1966. The largest rises appear to have been in overtime worked in the basic materials and the motor vehicle industries.

Real output per head fell during 1965/66 but resumed an upward trend in 1966/67. To a large extent this was the result of the marked change in rural output during these years. However, non-farm output per head seems to have risen more rapidly during the past year than during 1965/66, particularly during the second half of the year. The increase during 1965/66 and the early part of 1966/67 was less than the rate to which we had become accustomed during the 1950's and the early 1960's. This was probably influenced by changes in the structure of demand and the tendency for firms to hoard labour in the expectation of increases in their level of activity.

Graph 9

Civilian Employment

Level, and Change over Previous Quarter
(Seasonally Adjusted)

* April – May Quarterly Rates

PRICES

As was to be expected in a period when the growth of demand was not giving rise to undue pressures on supplies, price increases were, generally speaking, fairly modest. However, the rise in the June quarter appears to have been more rapid and widespread than in the earlier part of the year. The Consumer Price Index rose by about 3.0 per cent between June 1966 and June 1967 compared with a rise of 3.3 per cent over the preceding twelve months. In both years there were increases in charges for a number of government services which accounted for a significant part of the rise in the index.

Average weekly earnings, which had increased by 4.4 per cent in 1965/66, rose by over 6.0 per cent during the year. This rise reflected a basic wage rise of $2 effective from July 1966, margins increases effective from January 1967 and higher overtime and other over-award payments.

Towards the end of the year the Commonwealth Conciliation and Arbitration Commission announced that as from the first pay period on or after 1st July 1967 the minimum weekly award wage of all adult employees under federal awards would be increased by $1 per week. The Commission decided to eliminate separate basic wage and margins, to express wages as a total wage, and to retain the minimum concept introduced in July 1966. The Commission stated that the next economic review of the total wage would probably commence in August 1968 and reviews would subsequently be held at annual intervals.

Imports of Goods and Services

Imports tend to follow, with a lag, variations in the pressure of final demand on supplies. Thus, during the 1960/61 cycle, as is shown in graph 8, the ratio of imports to expenditure (excluding farm stocks and discrepancy) reached a peak in the March quarter 1961 and a trough in the December quarter of the same year. In each case this was a few months after expenditure and demand for labour had reached turning points. Again, this ratio started to decline during the first half of 1965/66 after there had been some slackening in the rate of growth of expenditure, an increase in the ratio of non-farm stocks to gross national expenditure and an increase in unemployment. By about the beginning of 1966/67, expenditure had resumed a more rapid upward trend, excess non-farm stocks were in the course of being eliminated and the rise in unemployment was tapering off. Consistent with this the ratio of imports to expenditure began to follow an upward trend during 1966/67.

Imports of goods and services them-selves reached a trough in the June quarter 1966 and followed a sharp upward trend over 1966/67 although they tended to level out in the June quarter when they were running at an annual rate of $3,950 million. During 1966/67 imports amounted to $3,688 million while in 1965/66 imports had been $3,618 million.

All major categories of imports reached a trough at about the end of 1965/66. Since then imports of producers' materials (for all industries other than building and construction and motor vehicle assembly) and imports of final consumer goods have followed a pronounced upward trend. With investment expenditure declining during the early part of the year and then levelling out, imports of most categories of capital equipment tended to increase only moderately during the year. Imports of civil aircraft, however, increased quite substantially.

The relative trends in exports and imports have been reflected in the balance on overseas current account since net transfer payments have done little more than follow a slight upward trend. Thus, in seasonally adjusted terms the current account deficit reached a peak in the December quarter 1965 and fell, largely because of a lower level of imports, until the September quarter 1966. Since then the deficit has again tended to increase as imports have risen more rapidly than exports. The rise was not fully sustained in the final quarter of the year when the deficit, expressed as an annual rate, was $730 million, which was higher than the deficit of $655 million for the year as a whole, but well below the deficit of $876 million recorded in 1965/66. The trends in the major components of the balance of payments current account are shown in graph 10.

Graph 10

Balance of Payments

Current Account

(Seasonally Adjusted)

Financing Expenditure

To a considerable extent expenditure on goods and services is paid for from current income. However, a group can spend more than its income by incurring a financial deficit which must be financed either by running down assets or by borrowing. Attitudes to spending in excess of income will, however, be influenced by the terms and conditions on which borrowing can be arranged and by the benefits that would be foregone if financial assets were run down.

During 1966/67 there was a rapid rise in the income of the private sector; farm income increased sharply with the advent of more favourable climatic conditions and wages and business profits also increased more rapidly than in 1965/66. With investment expenditure, in particular, being hesitant, the rise in spending did not keep pace with this increase in income and for the year as a whole the levels of aggregate private sector expenditure and income were almost the same, whereas in 1965/66 the sector had incurred a financial deficit of the order of $400 million. The private sector normally has a financial surplus during the first half of the year but in 1966/67 this was substantially greater than in the comparable periods of 1964/65 and 1965/66. The deficit in the second half of the year seems to have been about the same as in 1965/66 but less than in 1964/65.

During 1966/67, for the second year in succession, current receipts of all public authorities did not rise as rapidly as their expenditures and consequently the sector's financial deficit was again larger than in the preceding year. The deficit of state and local government authorities was only slightly greater than in 1965/66 and the higher deficit for the public sector as a whole was largely reflected in the substantial increase in the Commonwealth's excess of expenditure over receipts (other than loan raisings), which increased from $251 million in 1965/66 to $535 million in 1966/67. This was about the same as the excess of expenditures envisaged in the budget; aggregate expenditures and receipts were both broadly in line with budget estimates. A shortfall in indirect taxes, which had been quite sluggish early in the year, was offset by higher income tax.

The combined public and private sector deficit during 1966/67 was lower than in both 1964/65 and 1965/66; this was, of course, matched by a smaller deficit in our balance of payments on current account. This deficit must be financed by running down overseas assets or by borrowing abroad.

The deficits and surpluses incurred by economic groups in a period represent the net outcome of many forces and their actual size is not the only measure of financial problems. Financing of a deficit will be easier if debtors are creditworthy and if the securities they are likely to issue or sell are those in demand by lenders. Deficits incurred during 1966/67 were financed without producing any undue pressure in the capital markets and interest rates. While long term rates tended to remain relatively stable, short and medium term decreased.

Public Finance

The Commonwealth Government's excess of expenditures over receipts of $535 million in 1966/67 was largely financed by net domestic loan raisings, which at $388 million were about $100 million more than in 1965/66. Gross domestic loan raisings at $646 million were higher than in the previous year while redemptions at $258 million were much the same. Debt maturing locally amounted to $779 million compared with $894 million in 1965/66. Loan raisings overseas, which included $91 million obtained under credit arrangements in the U.S.A. for the purchase of defence goods, slightly exceeded overseas redemptions and repurchases. The remainder of the deficiency of $138 million, together with the net reduction of $26 million in Treasury notes on issue and an increase of $1 million in cash balances, was financed by the issue of $90 million of Treasury bills and other borrowings of $75 million from the Reserve Bank. As the Bank acquired $80 million of Bonds from the Commonwealth in exchange for Treasury bills during the year, the amount of Treasury bills on issue increased by a net $10 million over the year.

Demand for new Commonwealth loan issues was strong throughout the year and subscriptions to each loan offered were relatively high. Raisings in the July loan were slightly less than in the August 1965 loan but each of the other three loans offered during the year raised more than the comparable loan in 1965/66. Banks and life offices were substantial subscribers to loans during the year.

A security with 35 years to maturity was offered for the first time as part of the July 1966 loan, because it was believed that there was a demand for a range of securities wider than that previously offered. The previous maximum period to maturity for which a Commonwealth cash loan had been issued was 25 years. Demand, particularly from life offices, for this security which has had the same yield as the concurrently offered 22 year security, was very strong and increased markedly in the second half of the year after short and medium term yields had fallen. During this period life offices and some other groups rearranged their portfolios and to some extent substituted this longer term security for shorter term issues.

Some technical changes were introduced to loan raising procedures in the February loan and these were continued in the May issue. The short-term securities were issued on a basis which enabled trading “cum-interest” shortly after the loan closed and the facility for making subscriptions to Commonwealth loans by instalment was confined to medium and long term issues. In addition, the earlier practice of announcing a nominal target for each loan was discontinued.

Local and semi-governmental bodies also raised more on domestic markets during 1966/67 than they had in the previous year. The Loan Council raised the limit on total raisings by bodies with borrowing programmes in excess of $200,000 to $268 million. The comparable limit in 1965/66 had been $250 million. No limit was placed on borrowings by bodies with smaller programmes. Actual raisings by all bodies during the year amounted to $342 million compared with raisings of $312 million in the previous year. The banking system, in particular, provided a substantially greater amount than in 1965/66.

Private loans provided $289 million, which was 85 per cent of the total money raised by local and semi-governmental bodies. Issues to the public raised $53 million, about the same as in the previous year. The response by investors varied widely between individual issues; in general, support improved progressively with the rise in liquidity in the December and March quarters. In February the maximum rates of interest on both private and public issues by local and semi-governmental bodies for periods of 10 years and over were increased by 0.125 per cent per annum. This made the maximum rate on public issues 5.625 per cent. Average market yields on existing semi-governmental securities rose to 6.0 per cent in the September quarter and remained close to that level during the rest of the financial year.

InternationaL Capital Transactions

The deficit on overseas current account to be financed by international capital transactions in 1966/67 was, as has already been indicated, less than in 1964/65 and 1965/66. However, during 1966, the heavy reliance by a number of overseas countries on monetary policy to restrain the growth of activity resulted in the emergence of demand pressures in international capital markets and interest rates rose to historically high levels. As economic expansion in these countries slowed down and the emphasis of policy restraints shifted from monetary to fiscal measures, pressures in world financial markets eased and interest rates, which began to turn down towards the end of 1966, fell noticeably early in the second half of 1966/67. By the end of the year the rates in some markets had levelled out while in others they had begun to rise.

Despite the decreases in international interest rates in a situation where Australian domestic rates were largely unchanged, the voluntary restrictions on capital outflow being applied by the United States and the United Kingdom continued to constrain the flow of capital into Australia. The U.S. extended its voluntary restraint programme about the middle of the financial year. The Administration has requested a two year extension of the Interest Equalisation Tax, which was scheduled to expire in July 1967, and for authority to raise the effective rate of the tax. The U.K. restrictions were sustained throughout the year and in the Budget brought down in April 1967 it was announced that they would remain in force for a further year.

In this setting net capital inflow fell well below the levels achieved in 1965/66 and, despite the lower deficit on current account, Australia's holdings of international reserves fell during most of the year. Over the twelve months to 30th June 1967 reserves fell by about $177 million; against this there was a rise of $26 million in our gold tranche position with the I.M.F. and short term credits, totalling $30 million, had been made available to the Reserve Bank of New Zealand.

Graph 11

Balance of Payments

Capital Account

(Seasonally Adjusted)

In 1966/67, as a whole, capital inflow from overseas amounted to about $530 million compared with $937 million in 1965/66. Private capital inflow fell by almost $280 million while official and marketing authority capital transactions together resulted in an outflow of $72 million during the year compared with an inflow of $57 million in the preceding year.

Private capital inflow, which had been at a particularly high level in the last half of 1965/66, fell sharply in the September and December quarters of 1966/67. To some extent this fall was probably a reflection of the shifting forward of some capital transactions in anticipation of the imposition of constraints on capital outflow in the April 1966 U.K. Budget. The voluntary restraints themselves and the generally tight international capital markets would also have been significant factors in the decline. Remittances through the banking system suggest that capital inflow from the United Kingdom and the United States declined through-out most of the year but some increase was evident in the final quarter.

During the second half of the financial year there was some recovery in the level of total private inflow; the inflow over this period was at an annual rate of about $700 million, which was higher than any year with the exception of 1965/66. The decline in private inflow during the year is, consequently, for the most part only a decline relative to the abnormally high level of 1965/66 and Australia clearly remains an attractive outlet for overseas funds. Given this, prospects for inflow in 1967/68 will depend on the situation in overseas capital markets including the extent to which restraints are applied.

The sharp increase in wheat exports was not fully reflected in our receipts of foreign exchange. The large exports of wheat in the last seven months of 1966/67 included substantial sales on credit, mainly to China, and consequently there was a sizeable capital outflow on behalf of marketing authorities. This contrasted with the situation in the eleven months to November 1966 when, with wheat exports at rather low levels, there was a net capital inflow. For 1966/67 as a whole, marketing authority transactions resulted in an outflow of $68 million compared with an inflow of $38 million in 1965/66.

There was also a turnaround in official capital transactions which, over the year, produced a net capital outflow of $4 million in contrast to the net inflow of $19 million achieved in 1965/66. Because of difficulties in overseas capital markets Australia floated only one international public loan during the first half of the year and the proceeds of this were not reflected in reserves until January. There were substantial redemptions during this half year and a capital outflow arising from payments for defence goods which were not matched by the arrival of goods during the half year. On balance, there was a net outflow of $80 million. With the easier situation in international capital markets during the second half of the year two further loans were floated and, in addition, drawings under the credit arrangements for defence purchases in the U.S.A. accelerated. Redemptions and repurchases of overseas loans were lower during this period and there was a net inflow of $76 million over the half year.

As shown in graph 11, capital inflow, after allowing for seasonal influences, fell short of the deficit on current account in each of the final three quarters of 1966/67 and there was an adverse monetary movement over the year. The movement in our international reserves figures indicates the continual improvement in our balance of payments between the March quarter 1965 and the June quarter 1966. However, since then the position has deteriorated. Holdings of gold and dollars by official and banking institutions increased over 1966/67 and the fall in reserves during the year was reflected in holdings of sterling.

There was no change in Australia's gold tranche position at the I.M.F. during the first half of the year but it increased by $26 million during the second half of the year. This was the net result of drawings of Australian currency by Spain, Ceylon and New Zealand and a repurchase using Australian currency by Argentina.

During the year the Reserve Bank of Australia made credit facilities to the extent of $30 million available to the Reserve Bank of New Zealand to help that country in its balance of payments difficulties.

The table opposite sets out recent movements in Australian Net Gold and Foreign Exchange Holdings of Official and Banking Institutions and the country's position at the I.M.F.

The level of international reserves at the end of the year was about the same as late in 1962/63 and represented four to five months imports of goods. In addition, Australia has significant drawing rights at the International Monetary Fund; the gold tranche position represents the amount that a member encountering a balance of payments deficit may draw virtually automatically while the credit tranche may be drawn subject to certain conditions.

The level of Australian international reserves is not a matter for immediate concern but clearly a continuation of the downward trend of the past year would give rise to misgivings before too long.

The intention of the U.S.A. and U.K. to strengthen their balances of payments has added to the significance of the efforts to find a supplement to existing sources of international liquidity. Several meetings between the Deputies of the Group of Ten and the Executive Board of the I.M.F. were held during 1966/67 but to date no final decisions have been reached.

Liquidity and Open Market Operations

The financial surplus of the private sector during the first three quarters of the year was larger than usual. Influenced by a cautious attitude of asset holders and in the early months of the year by expectations of a reduction in interest rates, this was reflected in a strong and sustained demand for Commonwealth Government securities. There were heavy subscriptions to Commonwealth loans (which have already been discussed), a rapid rise in Treasury notes on issue and substantial sales of securities by the Bank; demand for short-dated securities, in particular, was very high.

During the four months to end-October security yields remained unchanged. Over this period Treasury notes on issue rose by $143 million compared with $80 million in the comparable period of 1965/66. In addition, subscriptions to the 3 year security in the October loan were particularly large and there were substantial sales of short-dated issues from the Reserve Bank's portfolio.

During November, December and early January yields on short and medium term securities fell. Even so, demand for short-dated securities continued at a high level and there were further heavy sales by the Reserve Bank. Over this period from end-October to mid-January the yield on 2 year securities fell from almost 5 per cent to 4.5 per cent and the yield on 10 year securities fell from around 5.17 per cent to 5.00 per cent. There was little change in the yields on longer term securities.

The issue yield on Treasury notes remained unchanged at 4.58 per cent until the end of December when it was reduced to 4.26 per cent. Treasury notes proved to be a relatively attractive form of holding assets, particularly until the yield was cut, and this tended to moderate the demand for securities from the Bank's portfolio. Treasury notes on issue reached a peak for the year in February when they were some $270 million higher than at the beginning of the financial year; in the same period of the previous year they had risen by $230 million. Net sales of other Commonwealth Government securities from the Reserve Bank's portfolio in this July to February period were about $375 million in both years. The strong demand for securities placed a severe strain on the Bank's portfolio and during the period of rising liquidity it was necessary to supplement the Bank's holdings of short and medium dated issues by switches with official holders and by a funding operation in which the Bank acquired $80 million of bonds from the Commonwealth in exchange for Treasury bills.

In addition to the continuing demand for short-dated securities for liquidity and investment purposes there was considerable market activity during the early months of 1967 as holders of securities adjusted their portfolios in the light of the new pattern of bond yields.

Towards the end of the March quarter the private sector began incurring a deficit, as is usual when tax flows accelerate, and this was reflected in a sharp fall in holdings of Treasury notes and large sales of Commonwealth bonds to the Reserve Bank. Over this period yields remained unchanged. By the end of June the Bank's portfolio of marketable securities was about $115 million larger than at the beginning of the year (reflecting the $80 million funding in January and the acquisition of a further $75 million of marketable securities on 30th June in financing a defence borrowing by the Commonwealth Government) while Treasury notes on issue had fallen to a level $26 million below that recorded at 30th June 1966.

Over the year non-government holdings of Commonwealth Government securities redeemable in Australia (including Treasury notes and Treasury bills) as shown in the table on page 23 increased by about $550 million compared with a rise of $300 million in 1965/66. It is useful to consider changes in holdings of Government securities by the Reserve Bank and the rest of the non-government group separately. Reserve Bank holdings increased by about $125 million whereas they had fallen by a little less than this amount in the previous year; almost all the 1966/67 increase was in holdings of marketable securities.

The rest of the economy increased its holdings of Commonwealth Government securities by some $425 million, about the same as in 1965/66. The rise in trading bank holdings was considerably less than in the previous year. Authorised money market dealers increased their holdings of Government securities by considerably more than they had in 1965/66 while the increase in holdings of both savings banks and other non-government groups was also greater than it had been in the previous year. Figures for recent years are set out in the following table.

Graph 12

Commonwealth Government Securities

Non-official Holding of Marketable Securities

The average period to maturity of securities (other than Special Bonds) in non-official hands increased slightly during the year. Over recent years, as can be seen in graph 12, there has been a significant lengthening of the maturity structure of non-official holdings. The average period is now close to 10 years compared with less than 7 years prior to 1962.

Holdings of Liquid Assets by the Private Non-bank Sector

Over the year the private non-bank sector increased its holdings of cash and bank deposits as well as Government securities. However, the rate of increase in holdings of these assets was, in general, not much greater than the rise in Gross National Product.

Notes and coin held by the sector followed a fairly steady upward trend throughout the year and at the end of the year were $99 million higher than 12 months previously. Holdings of these assets had fallen during 1965/66, influenced perhaps by the changeover to decimal currency after having previously remained almost steady for about two years.

Trading bank deposits increased more rapidly during 1966/67 than they had in the previous year. Fixed deposits, seasonally adjusted, showed little change during the first half of the year and after rising in the March quarter tended to level out again in the closing months of the year. Current deposits broadly followed an upward trend for most of the year and for only the second time since 1959/60 increased more rapidly than fixed deposits. Since June 1960 there has been a most marked increase in fixed deposits as a proportion of total trading bank deposits; in June 1967 they were 40.5 per cent of the total compared with only 20.6 per cent in June 1960.

In August, the maximum interest rates on fixed deposits for periods from 30 days to 18 months were reduced by 0.25 per cent. The rate on deposits for periods from over 18 months to 24 months was not altered. This change restored the margins between rates for different periods, which had existed before the increase in rates in March 1965 and kept fixed deposit interest rates reasonably in line with rates in other sections of the capital market, some of which had begun to ease a little earlier.

Along with other liquid forms of financial assets, savings bank deposits also increased more rapidly during 1966/67 than they had in the previous year. Deposits continued to rise during the first half of the year at about the same rate as in the second half of 1965/66. During the second half of 1966/67 the rise, after allowing for seasonal influences, was much more rapid and brought the increase over the year to $515 million—the rise in 1965/66 had been $371 million.

Two developments during the year tended to increase the competitiveness of savings banks' deposits. Firstly, savings bank deposit interest rates were not changed when the shorter period trading bank fixed deposit rates were reduced. Secondly, savings banks, with the concurrence of the Reserve Bank, raised the interest bearing limit for accounts of individuals to $10,000 from the beginning of March—the previous limit of $6,000 had applied since July 1961.

Graph 13

Bank Deposits—Quarterly Movement

(Seasonally Adjusted)

The range of interest rates on fixed deposits and the margins between these rates and savings bank deposit rates appear to affect choices between current accounts, fixed deposits and savings bank deposits. The levels of these interest rates, of course, also influence choices between bank deposits and other classes of financial assets. The largest increases in fixed deposits over the past seven years have occurred shortly after rises in fixed deposit interest rates, as can be seen in graph 13. Relative interest rates are, of course, not the only factor at work but they appear to have a significant influence. Another factor is the range of periods for which fixed deposits can be accepted. For instance there was a sharp increase in fixed deposits in the June quarter 1964; this coincided with the reduction of the minimum term for which fixed deposits could be accepted from 3 months to 30 days. In other quarters where the range of periods has been extended there have also been strong increases in fixed deposits.

Bank Liquidity

Over 1966/67 bank holdings of L.G.S. assets were increased by $186 million compared with $227 million in the previous year; savings bank holdings increased more rapidly than in 1965/66 while there was a smaller increase over this period in trading bank holdings of these assets. The factors involved in these changes are shown in the table on page 25.

The main factors underlying the more substantial rise in the private sector's holdings of cash and Government securities during 1966/67 than had occurred in the previous year were the sharp increase in the Commonwealth Government's domestic issues of debt, which was almost double the increase in 1965/66, and the substantial rise in Rural Credits advances, which had fallen in 1965/66. The increase from these sources was offset to some extent by a greater fall in Reserve Bank holdings of gold and foreign exchange. Private non-bank holdings of cash and Government securities increased by more than double the increase in each of the two preceding years while bank holdings of these assets increased by less than in the previous year. The required Statutory Reserve Deposit ratio was not changed except for a reduction as part of the replenishment of the Term Loan Fund Account; in 1965/66 there had been reductions supplementing the rise in bank holdings of L.G.S. assets from other sources.

Graph 14

Major Trading Banks

Selected Assets

The swing within the year in bank holdings of L.G.S. assets was larger than in previous years. In particular, the rise in holdings of these assets during the first half of the year was substantially greater than it had been in earlier years; this was largely associated with a more pronounced rise in the Government deficit although, again, this was offset to a significant extent by a large rise in private non-bank holdings of cash and Government securities.

The rise in bank holdings of L.G.S. assets during the March quarter was less than in the comparable period of 1965/66. Rural Credits advances increased much more rapidly but international reserves fell and, in addition, transitional arrangements associated with the introduction of decimal currency had added to banks' holdings of L.G.S. assets in the March quarter 1966.

In the final quarter of the year the fall in bank holdings of L.G.S. assets was greater than the decline in the comparable period of 1965/66. In that year a larger rise in international reserves and releases from Statutory Reserve Deposit Accounts partly offset the rundown associated with the normal June quarter Government surplus and declines in Rural Credits advances.

Seasonally adjusted figures shown in graph 14 suggest that major trading bank holdings of L.G.S. assets had reached a trough about September 1965 which was shortly after the labour market had started to ease and about the time the rate of growth in expenditure had begun to slacken. Trading bank holdings of these assets then followed a sharp upward trend during the final nine months of 1965/66 with releases from Statutory Reserve Deposits helping to sustain this trend; at the same time there was a fairly rapid rise in advances. As they entered 1966/67 the major trading banks had an average margin of “free” liquidity (i.e. holdings of L.G.S. assets above the agreed 18 per cent minimum), some 2 per cent greater than a year earlier. In addition, their Term and Farm Development Loan Fund Accounts with the Reserve Bank were also higher to the extent of about 1 per cent of deposits—largely because of the establishment of the Farm Development Loan Fund Accounts towards the end of 1965/66. At the start of 1966/67 the banks, therefore, had a significantly larger credit base for lending than they had a year earlier.

With deposits rising rapidly the major trading banks shared in the large upswing in L.G.S. assets during the early months of the financial year and at the peak of the swing in February had a margin of “free” liquidity of almost 13 per cent. This rise was more than seasonal. In view of the hesitancy in private expenditure this rise in liquidity was not a cause for concern and the required Statutory Reserve Deposit ratio was not changed apart from the reduction in December to provide part of a replenishment of Term Loan Fund Accounts; there was a transfer of about $40 million to these Accounts, of which about $25 million came from the Statutory Reserve Deposits of the banks and the balance from other assets of the banks.

During the final quarter of the year, when bank lending was rising rapidly, the fall in trading banks' holdings of L.G.S. assets appears to have been more than seasonal. The year ended with the banks having a margin of “free” liquidity almost the same as at the commencement of the year.

Financial Intermediation

The financial transactions of the public authority sector have already been discussed, as have some aspects of international financial transactions. Such information as is available about the direct demands of overseas controlled concerns on the domestic capital markets suggests there has been an increase over the past year; in particular, there were some large equity issues. In May 1965 the Commonwealth Treasurer requested overseas controlled organisations who were contemplating calls on the domestic capital market to consult with the Reserve Bank. The text of this statement was published in the Bank's 1965/66 Annual Report. This request still applies and a growing number of enquiries is being received from such enterprises seeking, through the Reserve Bank, an indication as to whether proposed arrangements conform with the Government viewpoint.

Many financial transactions take place between groups within the private sector. It has already been shown that this sector as a whole broadly matched its income and expenditure in 1966/67 whereas in 1965/66 it had incurred a deficit of some $400 million. Within the private sector, the private non-finance group incurred a deficit of about $400 million, which was almost half the deficits incurred in each of the previous two years. The financial sector had a surplus of nearly the same amount; the surplus of this sector, which largely reflects the undistributed earnings of life and pension funds, continued to grow steadily.

Within the private non-finance sector it is clear that companies incurred a smaller deficit than in 1965/66; profits increased more rapidly than in that year and investment expenditure was lower. Persons and unincorporated enterprises had a larger surplus with savings rising more rapidly than personal capital expenditures. The recovery in rural income would have been a significant factor here.

During the past financial year there was a particularly strong increase in the private non-finance group's holdings of financial assets (see graph 15). The strong increase in holdings of cash, bank deposits and Government securities has already been discussed. In addition, the sector's holdings of debentures of listed companies and of deposits with the short term money market and building societies also increased much more rapidly than in 1965/66. Net contributions to life and pension funds continued to rise strongly.

The increase in net liabilities of the sector was only slightly greater than in the previous two years. Borrowing from abroad was significantly lower but this was more than offset by a considerable increase in lending by the banking system (including a substantial increase in Rural Credits Department advances) and a moderate increase in lending by non-bank intermediaries. Of some significance in this aggregate was a sizeable rise in rural advances of pastoral finance companies, which had declined during 1965/66.

Graph 15

Private Non-Finance Groups

Changes in Financial Assets and Liabilities

During the first half of the year the private non-finance sector, as usual, had a financial surplus but this was considerably greater than in the preceding two years, while the deficit incurred during the second half of the year was about the same as in the comparable period of 1965/66. Compared with that year the main change was the considerably more rapid increase in the sector's holdings of financial assets in the first half of the year. The increase in financial assets held in the second half of the year and the rise in liabilities of the sector in both halves of the year were all of the same order as in comparable periods of 1965/66. These changes are also shown in graph 15.

These financial transactions were undertaken in relatively easy conditions in domestic capital markets and there tended to be some decrease in short and medium term interest rates, particularly during the first half of the year. There was, however, little change in long term rates.

Share prices, which had increased a little during 1965/66, increased modestly during the past financial year. Prices tended to ease a little during late July and August but regained earlier levels in December. They subsequently fluctuated around this level until the last quarter of the year when some strong rises were recorded. The rises during the year arose initially from increasing interest in mining stocks but spread, to some extent, to other shares.

Trading Banks

Because of their large holdings of L.G.S. assets, trading banks were in a position to meet a large proportion of the demands for finance made on them by credit-worthy borrowers. The level of demand proved to be quite substantial and the strong upward trend in aggregate new lending by the major trading banks, which emerged about the beginning of 1966, continued during the first three quarters of 1966/67. In the final quarter of the year new lending was lower than the high level reached in the March quarter. Most of the increase during the year in aggregate new commitments took the form of overdraft lending although new term lending rose in the December quarter and accelerated further in the second half of the year. New farm development loan approvals increased as the year progressed and at the end of the year were running at a higher level than at the beginning of the year.

During the first half of the year existing restraints on bank lending were largely removed and, in addition, the Bank suggested to trading banks that some increase in term lending would be appropriate. The banks were asked to continue to favour lending connected with the drought and to maintain lending for housing and to continue their long standing favourable treatment of rural production and exports. At the same time the banks were requested to ensure that undue slack did not emerge in undrawn commitments. In December the Term Loan Fund Accounts were replenished.

Towards the end of the financial year, when new lending had increased sharply, activity seemed to be growing more rapidly and imports had risen strongly. Banks were, therefore, asked to moderate their new lending.

During the year the banks, after discussions with the Reserve Bank, extended the range of loans offered to their clients. In the first half of the year some banks began making personal instalment loans. These loans may be wholly unsecured and are subject to a maximum rate of interest of 6 per cent per annum flat; this rate is below that normally charged by most non-bank financial institutions; where some security is taken the rate of interest would be lower. It was not intended that this form of lending would replace overdraft loans where the borrower is able to meet the normal requirements of banks for an overdraft loan.

Around the end of the year the Bank agreed that trading banks could undertake short term mortgage and bridging loans at reasonable rates of interest not subject to the maximum overdraft interest rate. The loans covered include loans for property development or redevelopment for sale on completion. The interest rates on these loans are subject to consultation with the Bank.

As a result of the rising level of new lending and despite a significant increase in cancellations and reductions, over-draft limits, which had risen by only $29 million in the first half of 1965/66, also followed a strong upward trend from early in 1966; in the second half of 1965/66 they rose by about $130 million and in 1966/67 the increase was $415 million. Some new lending approvals made during the year related to particularly large projects; in some cases drawings against these approvals will extend over a lengthy period.

Over the two years from early 1964 to January 1966, new lending approvals of the major trading banks remained fairly steady but, as can be seen in graph 16, outstanding overdraft advances followed a strong upward trend. In January 1964 the ratio of outstanding overdraft advances to total limits was 53 per cent while it was 60 per cent in January 1966. The introduction of unused limit fees in January 1966 could well be expected to cause the usage ratio to remain at a higher level than previously. Since the beginning of 1966 overdraft advances have followed an upward trend, except in the June quarter 1966 when demand for bank finance rose less than seasonally; during this quarter private capital inflow from overseas was at a particularly high level. Over the year to June 1967, overdraft advances rose by some $280 million compared with rises of $246 million and $170 million during 1964/65 and 1965/66 respectively. Usage of limits has varied considerably since January 1966 but at the close of 1966/67 it was about 63.3 per cent, which was about the same as at the beginning of the year.

Graph 16

Bank Overdraft Lending

Major Trading Banks

Term loan advances outstanding also rose more rapidly in 1966/67 than in the previous year—$49 million compared with $34 million. The higher new term loan approvals during the year were partly reflected in a more rapid increase in loans outstanding during the second half of the year.

Graph 17

Farm Development Loans

New approvals for loans from the Farm Development Loan Fund Accounts, which had been established in the final months of 1965/66, were made at a rate of about $0.5 million per week during the past financial year; by the end of June 1967 new loan approvals since the inception of this form of lending had totalled about $30 million. Actual Farm Development Loan advances increased steadily throughout the year to total $19 million in June. Graph 17 shows movements to date. In January 1967, the latest date for which classified statistics are available, some 43 per cent of outstanding farm development loans were to sheep-grazing interests while loans to the wheat and dairying sectors were each about 17 per cent of the total.

Temporary advances to wool buyers reached a level during the wool selling period of the year significantly higher than in 1965/66 but showed a small fall over the twelve months to June.

In aggregate, advances of the major trading banks increased rapidly throughout the year although the rate of increase slackened a little in the June quarter. Over the 12 months to June advances recorded a rise of about $335 million, which was considerably greater than the increase of $214 million recorded in 1965/66.

Advances by other cheque paying banks increased by $29 million in 1966/67 compared with a rise of about $14 million in the previous year.

During the year there was fairly strong demand for bank finance from most industries and new lending approvals to all major industries increased significantly. The most substantial increases were in lending to the rural sector, the manufacturing sector (although only in the second half of the year), to persons both for housing and for other purposes and to “other” borrowers, which includes the mining industry. The increased lending approvals to the rural sector included commitments from the Farm Development Loan Fund, the Term Loan Fund and normal overdraft advances.

The rise in advances was more rapid than the increase in deposits and as a result there was a decline in the private non-finance sector's net claims on the trading banks over the year; in 1965/66 the sector's net claims had increased significantly. During the first half of the year, the rural, manufacturing and commerce industries all increased their net claims significantly more rapidly than in the comparable period of 1965/66.

The maximum interest rate on overdraft advances remained unchanged throughout the year; the last change was in March 1965.

Savings Banks

The more rapid rise in savings bank deposits during the year was accompanied by increases larger than in 1965/66 in savings bank holdings of all major forms of prescribed assets. Savings bank holdings of L.G.S. assets, which had tended to level out in the final months of 1965/66, increased fairly steadily during 1966/67 and over the year rose by $134 million. The rise in 1965/66 had been only about $50 million. Within this aggregate, savings banks' holdings of Treasury notes increased sharply during the early part of the financial year but were reduced substantially in the December quarter and remained at fairly low levels for the rest of the year. Over the year savings bank deposits with the Reserve Bank rose strongly.

Loans to local and semi-governmental bodies also increased steadily throughout the year to record a rise of $130 million which was somewhat greater than the increase of $106 million in 1965/66.

The Reserve Bank suggested to savings banks in September 1966 that it was desirable for aggregate savings bank housing approvals to continue at a rate not less than the average rate of lending in the six months to June 1966 when approvals had been at an annual rate of about $340 million. In the event, loan approvals exceeded this rate in every quarter of the year and over the year amounted to above $360 million. During the year there appears to have been a change in the composition of demand for housing loans and an appreciably higher proportion of applications were for loans to acquire used houses than in earlier years. The banks responded to this development and lending for used housing rose during the year to over 50 per cent of total housing loan approvals to individuals. They had fluctuated around 46 per cent throughout the preceding two years. This change would have tended to reduce the average lag between the time of approval of a loan and the actual drawing. Despite a rising level of repayments, loans outstanding rose more than in the previous year.

Savings bank holdings of L.G.S. assets followed a strong upward trend during the year but, as a proportion of deposits, they fell from 48.4 per cent to 46.4 per cent. The fall in this ratio was, however, less than in each of the preceding two years. Loans to local and semi-governmental authorities, and for housing and other purposes each, but particularly the latter two categories, represented a rising proportion of deposits, as can be seen in graph 18. However, rises in these proportions were not as pronounced as in 1964/65 and 1965/66.

The picture for the savings banks subject to the Banking (Savings Banks) Regulations is much the same. Over the year their aggregate holdings of liquid assets (including deposits with prescribed banks and the short term money market) and public sector securities (including local and semi-government) fell by almost 2 percentage points to 74 per cent of deposits. This was still well above the 65 per cent required under the Regulations although, of course, the position of individual banks varied.

Non-bank Financial Institutions

Most categories of borrowing from non-bank financial institutions rose only slowly in the early months of 1966/67 but as the year progressed some modest acceleration occurred. During 1965/66 outstanding loans of some of these institutions had fallen.

Despite the rapid rise in rural income during the year, the rural sector increased its indebtedness to the pastoral finance companies. After the breaking of the drought rural advances of pastoral finance companies resumed a sharp upward trend which, however, tended to level off near the end of the year. Advances by these companies had fallen in the June and September quarters of 1966 after having varied little more than seasonally during the previous fifteen months. Clients' credit balances, on the other hand, remained at a fairly steady level.

During the year new lending by finance companies increased and balances outstanding rose more rapidly than in 1965/66. Instalment credit balances outstanding, which had tended to remain fairly steady during most of 1965/66 and in the first quarter of 1966/67, subsequently resumed an upward trend. After some early hesitancy new lending provided for the purchase of motor vehicles rose. Amounts financed for the purchase of household goods and plant and equipment reflected the hesitancy in expenditure on these goods and rose only modestly over the year. Commercial loans paid over tended to fall during the year but there was little change in mortgage and personal loans and factoring. However, wholesale hire purchase rose. Indications are that leasing transactions are continuing to expand.

Net contributions to life offices continued to rise strongly during 1966/67. However, new loans paid over by these institutions, which had followed a downward trend during 1965/66 remained at the lower level throughout the year and the rise in loans outstanding seems certain to have been less than in 1965/66. On the other hand, life office holdings of debentures, notes and Commonwealth Government securities seem to have risen more rapidly than in the previous year.

Net funds invested in sub-units (unit trusts, land trusts and mutual funds) fell during the second half of the year after having remained reasonably steady during the first half. As in 1965/66 there was little net purchase of assets by these funds during the year.

Subscriptions to new capital raisings of companies during the first three quarters of 1966/67 were significantly higher than in the previous year. The increase resulted from higher raisings by means of debentures, notes, loans and deposits but new money raised by share issues was lower than it had been in the comparable period of 1965/66. The manufacturing and finance industries had smaller equity raisings while the commerce and “other” industries, which includes mining, raised larger amounts in this manner. Debenture raisings rose particularly sharply in the September quarter, when both the engineering and food industries raised large amounts, but since then new debenture raisings have only been a little higher than in the comparable period of 1965/66.

The short term money market was particularly active during the year and both the level of trading and the size of dealers' portfolios increased substantially.

The large increase in liquidity during the annual upswing was accompanied by a substantial increase in the level of funds lodged with the authorised money market. These funds, which had amounted to about $350 million at the end of 1965/66, rose to a peak of over $500 million in April; the rise over the comparable period of 1965/66 had been only about $90 million. During most of the remainder of the year funds lodged with the market were at a somewhat lower level but at the end of the year liabilities to clients rose sharply to just under $500 million. The increase over the year—$140 million—was greater than in any previous year since the short term money market was established.

Graph 18

Savings Banks

Ratio of Selected Assets to Deposits

As in previous years the banks made extensive use of the market as a repository for short term funds but over the year as a whole there was little change in the funds they had lodged with the market. A significant part of the increase in the market's liabilities to clients came from funds deposited by companies.

The market had fairly continuous recourse to last resort loans during the year with the overall scale of assistance much the same as in 1965/66.

Average interest rates paid by dealers fluctuated around 4.25 per cent throughout most of the year. This was a little below the rates paid during the closing months of 1965/66. The rates on new money accepted did fall a little at the beginning of November but the fall was not sustained.

The dealers' portfolio of Commonwealth Government securities rose by $100 million to $483 million over the twelve months to June but during the year had reached a peak of $507 million. Increased holdings of Treasury notes accounted for about 14 per cent of the increase in the portfolio of Commonwealth Government securities. The average maturity length of this portfolio, which had increased during 1965/66, showed little net change over the year. During 1965/66, the first full year in which dealers had been permitted to hold commercial bills in their portfolio, their holdings of commercial bills increased by almost $20 million to $29 million. There was a sharp fall in dealers' holdings of bills early in 1966/67 and they remained at about $13 million for most of the year but dealers' holdings rose rapidly in the closing months of the year and reached a figure of $36 million.

The level of market trading by dealers increased sharply during the year. Turnover in Commonwealth Government securities (excluding subscriptions, redemptions, rediscounts and other transactions with the Reserve Bank) was about $4,100 million, some 50 per cent higher than in 1965/66; dealings in Treasury notes again accounted for about 40 per cent of the total turnover. During 1965/66 turnover had increased by about 14 per cent. Dealings in commercial bills also rose by 50 per cent over the year.

Institutional Developments

During the year considerable progress was made towards developing in detail proposals put forward by the major trading banks for a special corporation to provide finance for projects of national importance. The aim of the corporation will be to assist Australian interests to participate in such projects, particularly in the area of the development of Australia's basic natural resources, by facilitating their access to additional sources of finance.

It is proposed that the corporation will provide finance to enterprises engaged in large scale projects, both by direct loans and equity subscriptions and by refinancing medium term loans made by the trading banks, individually or in consortium. In the case of refinanced loans, the trading banks themselves will assess the project and carry the risks of investments refinanced.

The funds for the corporation will come from share capital and loans from the trading banks, and borrowings from the Australian public. It will also seek to raise funds overseas. Initially the Reserve Bank will provide a measure of financial support to the corporation. Provided that the Government is satisfied with the detailed proposals developed by the banks, it is intended to introduce legislation to give the corporation the status of a bank on terms that will enable it to operate most effectively. The corporation's operating policies will be determined in consultation with the Reserve Bank.

The new institution will represent a further step in the development of the banking system and the financial system as a whole and should improve the capacity of the capital market to provide finance for Australian enterprises engaged in large developmental projects.

A significant feature of the Australian financial scene in recent years has been the particularly rapid growth in permanent building societies. The acceptance of societies as approved bodies for the Home Savings Grant scheme and by the Housing Loans Insurance Corporation has probably given added impetus to their growth. The societies have been providing a rapidly rising level of finance for housing although to some extent this may not be a net addition to aggregate housing loans but rather a rechannelling of funds which may have been made available for housing by other financial institutions.

The societies have been able to provide this increasing level of loans because they have attracted considerable funds. Thus over recent years money obtained by way of deposits and shares has increased by more than 20 per cent per year. In the early 1960's the annual rate of growth was a little over 10 per cent. In some States a large portion of this money raised is in the form of investing members' shares rather than deposits. These investments are normally repaid on demand but societies generally have power to invoke provisions delaying repayment.

During the year a number of non-bank financial organisations were granted exemptions by the Treasurer from having to comply with Section 8 of the Banking Act. Section 8 makes it an offence for an organisation to carry on banking business unless in possession of an authority. At the end of the year, exemptions were held by 115 organisations including pastoral finance companies, permanent building societies, finance companies, life offices, authorised dealers in the short term money market and operators in the commercial bill market.

An overseas bank established a representative office in Australia during the year and at the end of the financial year six overseas banks had representative offices in Australia. A number of overseas banks also have equity interests in Australian non-bank financial institutions.