Reserve Bank of Australia Annual Report – 1966 Monetary Policy
In the economic setting of 1965/66 monetary policy was faced with a task of some delicacy. From quite early in the year the domestic economy was characterised by a relatively finely-drawn balance between supply and demand, with a measure of uncertainty as to whether progressive slackening in the rate of increase of aggregate expenditure would give rise to serious structural problems. Concurrently, the continued strong rise in imports during the early months of the year, coupled with the prospective sharp drop in rural production as a result of drought, and greater than usual uncertainties regarding capital inflow, gave cause for concern about the balance of payments.
Following on the events of 1964/65, it was becoming more urgent that an early improvement in the balance of payments trend should be achieved, or at least in sight. To this end, it was desirable to keep interest rates relatively high and to achieve a moderation of the rate of increase in overall demand relative to domestic output. Given a necessarily large addition to governmental expenditures, including a substantial element of direct overseas spending for defence, as provided for in the Commonwealth Budget, maintenance of a fairly tight rein on private expenditure seemed necessary.
It was against this background that the Commonwealth Government made provision in its 1965/66 Budget for selective increases in direct and indirect taxation and the Reserve Bank maintained a broadly-based policy of restraint on bank lending.
As the year progressed, anxiety about the balance of payments diminished. From about the December quarter of the year, a declining trend in imports became evident and, with private capital inflow rising to very high levels, the fall in reserves was checked. Domestically, however, with the impact of drought spreading and signs of developing hesitancy in some sections of the economy, policy changes over the year consisted mainly of fairly gentle action designed to relieve sectional weaknesses and provide assurance against an undue slowing of the economic tempo.
Special arrangements had been made around the close of 1964/65 for banks to undertake lending for drought purposes outside the general policy of restraint. These arrangements were continued throughout 1965/66 and close contact was maintained with all trading banks operating in drought-affected areas, and with pastoral finance companies, to ensure that Reserve Bank policies were not inhibiting sympathetic handling of demands for bank finance arising from the drought.
To enable the banks to maintain their lending at a rate appropriate to the needs of the economy, including those arising from drought conditions, a programme of reductions of the Statutory Reserve Deposit ratio was implemented under which ratio reductions (including special reductions associated with term and farm development lending) aggregating 4.4 per cent were made, reducing the Statutory Reserve Deposit ratio from 13.8 per cent at June, 1965, to 9.4 per cent at June, 1966.
Early in 1965/66, when evidence of a slowing down in housing activity was accumulating, the Bank had discussions with savings banks about the availability of finance for housing over the year. The savings banks expressed confidence that, despite a lower rate of growth in their deposits, they would be able to maintain a high level of housing loan approvals. However, housing commencements continued to decline and, to help offset the downward trend, the Bank later requested the savings banks to lift their rates of housing lending and the Commonwealth Government made a supplementary allocation to the States under the Commonwealth and State Housing Agreement.
With drought giving prominence to the problems of rural producers, a further modification to the banking structure was made during 1965/66, designed to provide farmers with greater access to medium and long term credit. In accordance with arrangements announced by the Commonwealth Treasurer, Farm Development Loan Fund Accounts were established by each of the major trading banks specifically for the financing of farm development.
Major Trading Banks
As with the existing Term Loan Fund Accounts of the trading banks established in 1962, loans from these new accounts are to be essentially longer term in character than overdraft finance — up to about eight years in the case of Term Loans and up to about fifteen years for Farm Development Loans.
The aggregate amounts involved in these special funds are as yet small relative to the volume of overdraft lending, but it is likely that demand for longer term finance will grow in Australia's present phase of development. The special funds have been, in the particular circumstances, a useful mechanism for the entry of banks into these newer and longer term forms of lending but their establishment does not provide additional resources to the economy. If the balance between expenditure and available supplies is to be preserved, there is a limit to the total volume of credit which may be extended at any time and, to this end, longer term lending from special funds, like overdraft finance, must conform with prevailing general credit policies.
The scope for growth of bank lending, overdraft and term, must also be related to the community's willingness to hold bank liabilities. This in turn depends, to a large extent, upon the banks' ability to offer liabilities which are suitably competitive with those offered by other intermediaries and final borrowers. The growth of bank fixed deposits over recent years, which has been encouraged by monetary policy, is an expression of this competition. If longer term lending assumes greater importance within the banking system, monetary policy and prudent bank management may both come to suggest the desirability of further lengthening the maturity structure of bank liabilities. Banks can attract term funds at lower costs than most of their competitors and can therefore make available to borrowers the resulting increase in the volume of finance more cheaply than those competitors could. At the same time, the increasing proportion of term deposits over recent years has resulted in a substantial increase in the average cost of funds to banks.
In governmental securities markets, prospects at the beginning of 1965/66 had suggested the likelihood of a fairly difficult year for the authorities, with the strong possibility that the financing of governmental operations would require a substantially greater take-up of Commonwealth Government securities by the banking system than in 1964/65. In the event, however, demand for all forms of governmental securities was quite well sustained and the banking system take-up of Commonwealth debt was actually less than in 1964/65. At some stages the market appeared to be expecting an early downward adjustment to Commonwealth bond yields but no significant changes ensued and these expectations receded over the closing months of the year. Over the year as a whole, the net effect of all transactions in marketable Commonwealth Government securities, other than Treasury notes, was to produce an increase in the holdings of the public somewhat greater than in 1964/65 and a lengthening of the maturity structure of Government debt held outside official hands.
Against a background of increasing tightness in financial markets generally, recent moves by the United Kingdom authorities to restrict the outflow of capital to the developed countries of the sterling area, and to encourage British firms to place greater reliance on local markets to provide the funds needed for their expansion programmes, focus attention on the limitations of the Australian capital market and the particular problems of financing large-scale undertakings.
In May, 1965, the Commonwealth Treasurer had outlined the Government's general viewpoint on the question of capital raisings in Australia by overseas-controlled enterprises. An extract from his statement is appended to this Report. In accordance with a suggestion the Treasurer made in this statement, the Bank has been receiving a steady stream of enquiries regarding proposed issues by such enterprises. Following the announcement of the United Kingdom measures, the Treasurer reaffirmed the view previously expressed that it would be helpful to all parties if the interests concerned were to consult generally with the Reserve Bank as to the calls they envisage making on the Australian market, and especially where there is any doubt as to whether the particular arrangements they have in view would be conformable with the Government viewpoint.
Some current and prospective developmental projects, such as those associated with minerals, require huge amounts of capital. The Bank had been discussing with trading banks ways in which funds might be mobilised in Australia to assist in the financing of such large projects. Following these discussions the major trading banks put forward some suggestions regarding the formation of a special corporation to provide finance for projects of national importance. At the close of the year, these suggestions were still being considered.
TRADING BANKS
Bank Liquidity
During 1964/65 the ratio of L.G.S. assets (liquid assets and Government securities) and Statutory Reserve Deposit Accounts to deposits of the major trading banks had fallen from 39.5 per cent to 36.0 per cent. Although relief from the impact of this rundown had been afforded by reductions in the Statutory Reserve Deposit ratio, banks were left with a relatively narrow average margin of free liquidity of 4 per cent above the 18 per cent agreed conventional minimum. Further fairly substantial reductions in banking liquidity were in prospect for 1965/66, largely associated with the expected deficit in the balance of payments. Accordingly, the Reserve Bank indicated to the trading banks that, over the year, it would progressively reduce the Statutory Reserve Deposit ratio to permit them to maintain lending at a rate appropriate to the needs of the economy, including particularly those arising from drought conditions.
The seasonal rise in bank liquidity during the first five months of the year was relatively modest and the first reduction in the Statutory Reserve Deposit ratio under the programme, from 13.8 per cent to 12.8 per cent, was made on 7th December, when banking liquidity was coming under the usual Christmas pressure. After Christmas, liquidity rose strongly until February, at which point the average L.G.S. ratio was a little over 30 per cent and the L.G.S. assets were some $540 million higher than in June, 1965. Of this increase, about $180 million was in Treasury notes, and $270 million in other Commonwealth Government securities. Holdings of notes and coin were abnormally high during the changeover to decimal currency.
Bank Liquidity
With the advent of a strong seasonal downswing in liquidity, further reductions in the Statutory Reserve Deposit ratio aggregating 3.4 per cent were made on 5th April and 26th April. Of the reduction of 2.4 per cent made on 5th April, 0.9 per cent was associated with the establishment of the Farm Development Loan Fund of $50 million and an addition to the existing Term Loan Fund, as referred to later in this Report.
The effect of these reductions was that funds made available from Statutory Reserve Deposits met a substantial part of the rundown in bank liquidity over the closing months of the year. In the process, the Statutory Reserve Deposit ratio was reduced to 9.4 per cent, its lowest level in the post-war period, and the average L.G.S. ratio in June was held at 24 per cent, giving the banks a margin of free liquidity above the 18 per cent agreed conventional minimum about 2 per cent wider than in June, 1965.
Bank Lending
Throughout 1964/65 bank lending policy had been directed towards limiting the growth in expenditure. In 1965/66 it was considered that, in the face of a prospective heavy demand for finance, a policy of restraint on bank lending would be appropriate. Accordingly, banks were requested to continue to exercise restraint in granting new overdraft approvals and, in general, to aim to ensure that cancellations and reductions of existing limits continued at a high level.
Special arrangements had been made around the close of 1964/65 for banks to undertake lending for drought purposes outside the general policy of restraint. These arrangements were continued during 1965/66. From early in 1964/65 banks had also been asked to favour lending for purposes which would aid production rather than add to consumption and to avoid lending for possibly speculative purposes. Subsequently, they had been asked to refrain from adding to pressure on the construction industry, particularly from commercial building projects. In 1965/66 they were requested to continue this general policy but, from about September, they were specially asked to maintain their lending for housing and to be discouraging in dealing with applications for finance which was likely to be associated with speculative stock building, particularly of imported goods.
Throughout the year the Bank kept itself closely informed of developments in the drought situation and of the consequent demands of primary producers for finance, particularly from the banking system. Close contact was maintained with trading banks and pastoral finance companies operating in drought-affected areas with a view to assessing demands for, and availability of, finance for drought relief. In order to obtain facts about losses of livestock and the effect of drought on production, producers' incomes and finances, the Bank also conducted a sample survey of commercial grazing and non-irrigated crop farms in seven Pastures Protection Districts of northern New South Wales which were amongst the most severely drought-stricken districts of New South Wales. Trading bank loans have, of course, never been regarded as a suitable source of funds for all forms of drought relief. However, the Bank is satisfied that traditional preferential treatment of the rural industries has been, and will continue to be, extended in a sympathetic way to bank customers affected by drought and problems of restocking.
No changes in trading bank interest rates were made during the year. The rate of new overdraft approvals averaged about $21 million per week, a little higher than in the previous three years. Within this aggregate a decline in approvals to financial institutions was more than offset by increases in other approvals, including rural approvals attributable to drought relief. The rise in aggregate overdraft limits outstanding was much the same as in 1964/65, despite a significant rise in cancellations and reductions of limits during the second half of the year. This increased rate of cancellations and reductions of limits appears to have been partly related to the introduction, as from 1st January, 1966, of a charge on the unused portion of some overdraft limits.
Broadly the charge applies to overdraft limits of $100,000 and over, subject to exemptions for certain classes of accounts such as those of public bodies, churches and charities, specified export accounts and certain rural commodity marketing accounts. Where the fee applies, charges range from ½ per cent to 1 per cent per annum according to the proportion of the total limit which is unused, with rebates for credit balances and fixed deposit funds in excess of the amount of the overdraft. The fee is subject to an overriding maximum of $40,000 per annum. No charge is made when the unused portion of the limit is 10 per cent or less of the total limit. In introducing the fee, the banks stated that it was designed to provide them with a return commensurate with the commitment involved in maintaining a large unused limit, and to encourage bank customers to reduce limits they may be holding unnecessarily.
Major Trading Banks' Overdraft Lending
The existence of a wide margin of unused overdraft limits makes for some uncertainty of response to credit policy changes. The introduction of a charge on unused limits should help to narrow this margin and, from this viewpoint, was welcomed in principle by the monetary authorities. At the same time it was recognised that, in the initial period of its operation, the charge could give rise to additional uncertainties as regards the appropriate rate of new lending by banks.
Although the rise in overdraft limits outstanding during 1965/66 was much the same as in 1964/65, advances outstanding against these limits increased at a slower rate. For the major trading banks, the rise (excluding temporary advances to wool-buyers and term and farm development loans) amounted to $170 million, compared with $246 million in 1964/65. Nevertheless, the utilisation ratio continued to rise from 60 per cent at June, 1965, to nearly 62 per cent at June, 1966.
During the year the banks were also quite active in commercial bill acceptance and discounting and, at the close of the year, held bills to the value of about $7 million.
Term Lending
Under arrangements instituted In April, 1962, resources to finance fixed term loans for periods ranging from about three years up to about eight years for capital expenditure for production in rural, industrial, and to a lesser extent commercial fields, and also to finance exports, were set aside in Term Loan Fund Accounts with the Reserve Bank and augmented over subsequent years. In each instance the amounts involved were provided as to approximately two-thirds from banks' Statutory Reserve Deposit Accounts and one-third from their other assets.
To the end of September, 1965, a total of $225 million had been transferred to Term Loan Fund Accounts. As the Bank wished to see term lending continue to contribute to the growth of the economy generally and play an active part in the post-drought rehabilitation of rural producers, it indicated to the banks that it was prepared to agree to a further transfer to the Term Loan Fund Accounts. Accordingly, on 5th April, 1966, further transfers from Statutory Reserve Deposit Accounts and the banks' other assets equivalent to 0.4 per cent of deposits were made, increasing the total of the Term Loan Fund to $246 million.
At this level, it was considered that, in general, requirements for the year 1965/66 should be adequately covered. The Fund is designed to operate on a revolving basis with the flow of repayments of existing loans into the Accounts being available for new lending.
Over 1965/66 new term loan approvals totalled $68 million and loans outstanding increased by $34 million. In 1964/65 new approvals had totalled $75 million and outstandings had risen by $56 million. At June, 1966, total loans outstanding amounted to $207 million and the balances remaining in the Term Loan Fund Accounts with the Reserve Bank were $48 million. Of the total loans outstanding at the end of 1965, 47 per cent were for manufacturing and 35 per cent for rural purposes.
Farm Development Loan Fund
In conjunction with the augmentation of the Term Loan Fund Accounts, transfers from Statutory Reserve Deposit Accounts and the other assets of the banks were also made to give effect to the establishment of a Farm Development Loan Fund of $50 million, as announced by the Commonwealth Treasurer on 31st March.
The establishment of this Fund was designed to provide primary producers with greater access to medium and long term finance through the banking system for farm development purposes, including measures for drought recovery and mitigation of future droughts. Details of the arrangements were worked out in consultations between the Reserve Bank and the trading banks. Separate funds for each of the major trading banks were established on 5th April in the form of accounts with the Reserve Bank, funded as to approximately two-thirds by transfers from Statutory Reserve Deposit Accounts and one-third by transfers from the banks' other assets.
Loans from Farm Development Loan Fund Accounts will be made by the trading banks to rural producers, particularly smaller producers. They will supplement loans available from the trading banks on overdraft and from Term Loan Fund Accounts and will represent a net addition to bank lending to the rural sector. They will be on fixed term for periods of up to 15 years, with longer periods possible in special cases, and carry rates of interest within the range of preferential overdraft rates normally applicable to rural customers.
In the first three months of operation of this Fund, loan approvals from it amounted to $5 million.
Australian Banks' Export Re-Finance Corporation Limited
This Corporation was formed in September, 1964, to provide assistance to individual banks to enable them to handle very large or extended export transactions without undue strain on their own resources. It is performing a useful role in providing banks with assurances of refinancing facilities which enhance their ability to undertake commitments to finance exporters bidding for overseas trade contracts. In this regard, possible re-financing transactions foreshadowed to the Corporation since inception have aggregated $20 million. Actual recourse to the Corporation's refinancing facilities has, so far, been on a minor scale.
SAVINGS BANKS
No changes in savings bank interest rates were made during 1965/66. The rise in savings bank deposits was less than in 1964/65 and, for the second year in succession, the net gain over the last four months of the year fell short of the amount of interest added to accounts in this period. At June, 1966, deposits totalled $5,280 million, having risen by $371 million over the year, compared with increases of $413 million in 1964/65 and $539 million in 1963/64.
Reflecting this slower expansion in their liabilities, the major categories of savings bank assets also grew at a reduced rate in 1965/66. A substantially higher rate of lending for housing was financed to an increased extent from repayments of existing loans, and the rise in outstandings, at $173 million, was $14 million less than in 1964/65. Increases in holdings of Commonwealth Government securities ($29 million) and local and semi-governmental securities ($106 million) were respectively $50 million and $30 million less than in the previous year.
At the end of June, 1966, housing loan outstandings of savings banks subject to the Banking (Savings Banks) Regulations represented 24.0 per cent of their deposits, compared with 22.4 per cent at June, 1965. Holdings of liquid assets and public sector securities accounted for 75 per cent of the June, 1966, deposits of these banks, some 10 per cent above the minimum required under the Regulations.
Early in 1965/66, in consultations with the Bank about the availability of finance for housing, it had been agreed that the savings banks would aim to maintain a steady and substantial volume of lending, notwithstanding the possibility that the lower rate of growth in their deposits would continue. As the year progressed and dwelling commencements continued to follow a declining trend, the Bank considered it appropriate for the concentration of savings bank funds in housing to be increased for a time to assist in offsetting this downward trend. Accordingly, it asked all savings banks to explore the possibility that some further housing finance, additional to the high level of approvals already being maintained, might be made available over the remainder of the financial year, with an emphasis on new rather than existing housing.
The savings banks responded quickly and effectively to this request. Their aggregate approvals for the year reached the record total of $324 million, some 9 per cent higher than in 1964/65. Housing loans outstanding rose quite sharply in the closing months of the year as the increased rate of approvals began to reflect in drawings.
Savings Banks/Housing Loans Approved
It is appropriate that savings banks, as the largest contributors to the financing of private sector housing, should continue to expand their lending for housing broadly in proportion to the growth in the community's requirements and, from time to time, help to offset temporary shortfalls in the overall availability of housing finance. However, it needs to be borne in mind that the savings banks also play a major role in mobilising funds for investment in the securities of public authorities providing community services which are, in many ways, necessary complements to housing growth.
GOVERNMENTAL SECURITIES MARKETS
During 1965/66 the Commonwealth Government floated four cash loans, the same number as in 1964/65. Yields offered in these loans were broadly in line with the pattern established in the final cash loan in 1964/65, ranging from 5.00 per cent per annum on two to three year maturities up to 5.25 per cent per annum for 20 to 22 years. These issues produced cash proceeds of $464 million, some $50 million more than in 1964/65. The first three loans were all over-subscribed, the third issue in February producing $174 million against a target of $100 million. In part this buoyancy of loan raisings appeared to reflect heightening expectations of an early downward adjustment to yields. However, these expectations receded over the closing months of the year and subscriptions to the final loan in May fell short of the $75 million target by some $13 million.
Special Bonds remained on issue continuously throughout the year and contributed $80 million to total cash raisings, compared with $87 million in 1964/65. Redemptions, however, were some $22 million higher, reflecting in large part the maturing on 1st January, 1966, of Series A Special Bonds, first offered in October, 1958. There are now 12 series of Special Bonds currently on issue with aggregate outstandings of $571 million.
In all, the Commonwealth obtained $547 million from domestic cash issues and Special Bonds in 1965/66, some $45 million more than in 1964/65, but still short of the record peace-time raisings of $579 million achieved in 1963/64. As in 1964/65, substantial support for cash loans was given by institutional investors. Reflecting their less buoyant deposit experience, savings banks' subscriptions were significantly lower. However, this shortfall was more than offset by heavier subscriptions from trading banks, brokers and others. Particularly in the over-subscribed February issue, some groups of investors gave strong support to short term securities.
Domestic maturities of Commonwealth Government loans, other than Special Bonds, were relatively heavy, amounting in all to $850 million, some $131 million greater than in the previous year. Of this total, $675 million was converted to new issues and Special Bonds, leaving $175 million to be redeemed, compared with conversions of $505 million and redemptions of $214 million in the previous year.
The seasonal peak in outstandings of Treasury notes of $314 million was reached on 9th February, somewhat earlier than last year and $122 million below the 1964/65 high point. In large part this lower peak was a reflection of the lower level of outstandings at the beginning of the year. However, the actual rise was also significantly less than in 1964/65; this was mainly accounted for by smaller increases in holdings of banks and short term money market dealers.
The seasonal rundown in liquidity over the closing months of the year brought the usual rapid decline in the amount of Treasury notes on issue. At 30th June, 1966, total Treasury note outstandings were $116 million, some $36 million higher than in June, 1965.
Although Government security yields remained substantially unchanged over 1965/66, a change was made in the terms on which Treasury notes are issued. The tax rebate of 10 cents on each dollar of income from Commonwealth Government securities included in taxable income was no longer available on Treasury notes issued from 14th February, 1966, and the issue yield was increased from 4.25 per cent per annum to 4.58 per cent per annum as from that date.
Commonwealth Government Securities
A particular feature of the behaviour of the Government securities market during 1965/66 was that the strong seasonal upswing in banking and public liquidity coincided broadly with a period of heightening expectations of an early downward adjustment of security yields. This served to increase the attractiveness of Government securities generally in the eyes of certain classes of investors and stimulated some groups towards a lengthening of their portfolios. This tendency was evidenced in a shift in seasonal demand away from Treasury notes and in the buoyancy of loan raisings over the first three-quarters of the year. It also had a marked impact on the pattern of the Reserve Bank's operations during the course of the year.
Over the first three months of 1965/66, the Bank's portfolio of Commonwealth Government securities (other than Treasury bills) showed little net change. From October through to February, however, the Bank was a very substantial net seller and, by February, when banking and public liquidity reached its seasonal peak, the Bank's portfolio had been reduced to its lowest post-war level.
During the seasonal rundown, the Bank's portfolio rose strongly, reflecting heavy purchases of short-dated securities which banks and other investors had apparently been holding to meet the rundown. These purchases partly offset the heavy selling over the earlier part of the year and, at 30th June, 1966, the Bank's portfolio had returned to $557 million to show a net decrease over the year of $75 million.
Over the year as a whole, the net outcome of all official transactions in domestic issues of marketable Commonwealth Government securities, other than Treasury notes, was to increase by about $330 million total holdings in non-official hands. These transactions also lengthened the maturity structure of non-official holdings. The average life to maturity of securities placed during the year appears to have been around nine years, whereas most official purchases were of securities close to maturity. Amongst the groups of non-official holders which recorded significant increases in holdings over the year, trading banks, savings banks, life offices and money market dealers were prominent.
In local and semi-governmental security markets there were indications at the beginning of the year that, with heavy demands on institutional lenders by other classes of borrowers, bodies could encounter some difficulties in raising their allocations. Over the year as a whole, institutional support for private issues was lower than in 1964/65 and the major semi-governmental bodies placed greater reliance on public issues to raise their new money requirements. The amount raised in this way totalled $52 million, which was more than double the total for the previous year and the highest figure for new money raisings by public issues since 1956/57. Overall, most local and semi-governmental bodies were able to raise their new money allocations in full, though with more difficulty than in recent years. Conversion offers in respect of maturing public loans sought $76 million and raised $71 million, compared with $91 million sought and $74 million raised in the previous year.
Interest rates on new issues by local and semi-governmental bodies remained unchanged over the year, the maximum permitted rates being 5.50 per cent per annum on public issues and 5.75 per cent per annum on long term private loans. As in previous years, investors in public issues were offered the option of medium or long term securities at differential interest rates. Market yields on existing semi-governmental securities rose sharply in the first two months of 1965/66 but subsequently settled back to about 0.40 per cent above the maximum public issue rate and fluctuated around this level over the remainder of the year.
SHORT TERM MONEY MARKET
Conditions in the short term money market were somewhat easier for dealers in 1965/66 than in the previous year. The change in the timing of the Commonwealth Government's payments to the States, which operated from July, 1965, tended to reduce the wide intra-month fluctuations in the volume of funds with the market which were a feature of the previous year's operations. Recourse to the Bank for last resort assistance was on a lower scale than in 1964/65.
From a level of a little over $300 million at the beginning of the year, the volume of funds with the market rose to nearly $390 million during the seasonal flush and fell back to about $350 million at the close of the year. This seasonal swing was reflected in the general pattern of interest rates paid by dealers. Starting the year at around 4¼ per cent, the weighted average interest rate on loans outstanding declined to slightly below 4 per cent during the seasonal flush. With the onset of a sharp rundown in liquidity in March, the general level of rates rose to about 4½ per cent and fluctuated around this level over the remainder of the year. During the year, for the first time in this market, rates higher than 6 per cent were paid on several days for loans at call.
The market was again active in dealings in Commonwealth securities, including Treasury notes. Total turnover in these securities (excluding subscriptions, redemptions, rediscounts and other transactions with the Reserve Bank) amounted to about $2,700 million, an increase of about 14 per cent on the previous year's trading. In 1964/65 the market had been reducing the average length of its aggregate portfolio of Government securities; however, a reversal of this tendency began late in 1964/65, and this continued throughout the following year. By June, 1966, a considerable lengthening of dealers' portfolios had taken place.
In the latter half of the year, dealers were also quite active in dealings in commercial bills. Their holdings of bills in June, 1966, totalled about $25 million, some $15 million higher than in June, 1965.
FOREIGN EXCHANGE OPERATIONS AND CONTROL
The banking system's turnover in foreign exchange business arising from Australian trade and capital transactions with overseas countries was maintained at much the same level as in the preceding year. Towards the end of the year there were indications that tighter credit conditions in some countries and the trend to higher interest rates abroad could bring pressure on local sources to provide some of the trade financing which customarily has been arranged in overseas centres. There was also evidence of a growing interest by overseas traders in the use of Australian currency in settlement of transactions, in lieu of the recognised international trading currencies.
Throughout the year banks and traders made considerable use of the facilities available to cover themselves against the possibility of a change in the exchange rates between Australian and overseas currencies. A wide range of current transactions was covered under the facilities available to traders.
There were no significant changes in exchange control policies and procedures during 1965/66. Whilst further approvals were given for certain types of direct investment overseas, close control over outward capital movements on Australian account continued to be exercised; transfers of funds, in both capital and current fields, due to overseas residents were freely authorised.
From Exchange Control records it was apparent that the relatively large capital inflow over the year included a significant proportion of funds supplied on a loan basis and in connection with ventures associated with mineral and oil exploration and development. A continuing tendency on the part of some overseas buyers of Australian goods to seek extended payment terms was also evident; approval was given in those cases where it appeared that such a course was in Australia's best interests.
Following action taken by the United Kingdom to remove Rhodesia from the Sterling Area, the necessary consequential amendment was made to the Banking (Foreign Exchange) Regulations on 18th November, 1965.