Reserve Bank of Australia Annual Report – 1977 Monetary Policy and Financial Developments

Public sector demand for funds was again very strong in 1976/77, and its size and strongly seasonal nature (accentuated by the suspension of quarterly tax instalments) dominated financial conditions throughout the year. Within the private sector, demand for funds by households (including unincorporated enterprises) was buoyant, particularly for housing finance. Corporate demand for funds, except for working capital, appears to have been lower than in recent years.

For the year as a whole, the deficit in the Commonwealth Budget called for large amounts of finance; net non-bank financing of the Budget was some $1,100 million, or about 40 per cent of the deficit; the remainder was met by the banking system, and principally by the Reserve Bank, and was the main factor in the increase in the community's liquidity over the year.

The net outflow of funds from the Government was seasonally large during the first eight months of the financial year. There were offsets so far as domestic liquidity was concerned; during the September quarter, holdings of bank bills acquired by the Reserve Bank in the June quarter matured, and for a time their refinancing from private sources slowed the growth in liquidity. Part of the increase in liquidity found an offset in the falling level of overseas reserves in the period to November 1976, and the upward movement in domestic liquidity was to that extent slower.

The ease in liquidity early in the financial year lent itself to the refinancing of the bank bills run off by the Reserve Bank, and to the rebuilding of the liquidity of some groups of intermediaries, which had been reduced in the latter part of 1975/76. It also provided a basis for a widespread and rapid upsurge in lending. With the prospect of a very tight June quarter, and requests by the Reserve Bank for restraint, the pace of lending moderated later in the year.

The payments of company and provisional tax in the seasonal rundown were as heavy and as concentrated as had been earlier anticipated. Large holdings of Treasury notes had been accumulated by banks and others to provide for the expected heavy payments, and the provision so made was to some extent augmented by the capital inflow which followed the November devaluation. In the event, the tight June quarter was traversed without undue seasonal tightness in the money markets, and, for the most part, without abnormal movements in short-term interest rates.

An indicator of financial conditions during the year is growth in the money supply broadly defined (M3). For the year as a whole M3 grew by 10.6 per cent. This was an increase lower than in the most recent years, and was towards the lower end of the range mentioned as an indication of the monetary outlook in the Budget Speech in August 1976. But there were substantial fluctuations in the growth of the money supply during the year. Over the first half of the year, M3 grew at annual rates in excess of 20 per cent (around 15 per cent seasonally adjusted) but with growth slowing over the second half of the year, M3 grew at annual rates of about 10 per cent in the March quarter (both actual and seasonally adjusted) and declined by 13 per cent in actual terms in the June quarter (a rise of 3 per cent seasonally adjusted). Changes in recent years in the size and timing of government receipts and payments, and other influences, have, however, affected seasonal patterns in a way which is difficult to measure accurately. For the volume of money, the net effect appears to have resulted in a seasonally adjusted series which tended to overstate the underlying rate of growth in the first half of the year and to understate it during the seasonal rundown.

Monetary and Banking Policies

In such a year, the contribution that monetary policy could bring to improvement of economic conditions was necessarily a modest one. There was need to ensure that liquidity, lending, and the growth of the monetary aggregates avoided either of two extremes. With unemployment high, it was important that a sufficient flow of finance be available to fund any emerging upturn in the private sector, and that interest rates did not move sharply upward, particularly during the expected tight June quarter. Equally, with inflation unacceptably high, and the more so with the expected lift in prices flowing from the November devaluation, the role of monetary policy was to provide support to the other policy instruments that were brought to bear against inflation, by exercising some restraint.

With the unusually sharp seasonal reversal in the government accounts, and with substantial changes within the year in the level of international reserves, the maintenance of moderate pressure against undue expansion of financial aggregates required a series of adjustments of the instruments of policy.

A continuing concern in monetary policy throughout the year was the containing of the growth of lending by financial intermediaries. Trading bank new lending was the subject of Reserve Bank requests for restraint, and this policy was supported by SRD action which firmly contained banks' free liquidity to levels consistent with the degree of restraint sought. Discussions with other intermediaries on lending were generally set against the background of the need for restraint in the growth of monetary aggregates.

A second important objective was to reduce the impact of the deficit on monetary creation by placing as large a volume as possible of government securities with the non-bank private sector. Additionally, the monetary authorities encouraged, through variations in terms of issues and by counsel, a maturity pattern of private sector holdings of government securities appropriate to cope with the substantial seasonal rundown in liquidity. The banking deposit and lending rates controlled by the Reserve Bank were unchanged throughout the year; official security yields were adjusted by moderate steps on several occasions.

Short-term private sector interest rates, which are generally the most sensitive to market conditions, fell slightly during the first few months of 1976/77, reflecting seasonal liquidity conditions. Interest rates on 90 day bank bills edged down from 10.5 per cent in June to around 9.4 per cent in September and similar movements were reported for interest rates on other private sector short-term liabilities. That the fall was so modest reflected the vigour with which some groups then pursued funds in order to rebuild liquidity. The extent of the fall was probably also limited by the level of official rates, which had remained broadly unchanged over July and much of August from levels prevailing in the second half of 1975/76.

Prior to the 1976/77 Budget, there was some expectation that official rates had peaked and would soon fall; the demand for longer dated bonds strengthened, and the maturity of debt held by both banks and non-banks lengthened. There were very heavy cash subscriptions to the Commonwealth's July 1976 loan, with the bulk of subscriptions going into the 5 and 10 year bonds. Concurrently, private sector holdings of Treasury notes ran down substantially, and there were substantial sales of short-dated bonds to the Reserve Bank. By the end of July, holdings of Treasury notes by the private sector had fallen to their lowest level for six years.

After the 1976/77 Budget was known, the need became evident for the private sector to build up large holdings of assets suitable to finance the heavy tax payments which would be concentrated in the June quarter. With this in view, Treasury note issue yields were increased by 1 per cent in two steps in August and September. Coupled with a growing awareness of the need to stockpile high-grade liquid assets, this led to a strong flow of subscriptions to Treasury notes; between end August and end October, non-official holdings, mainly by banks, increased by $750 million. Net non-bank take-up of government securities to end October, however, was small. Net raisings from Savings Bonds (i.e. net of redemptions of earlier series of Australian Savings Bonds and Special Bonds) were some $50 million in the four months to end October.

14 Volume of Money Major Influences
half yearly changes. not seasonally adjusted.

By November, the continued rapid growth of financial institutions' balance sheets at a time of a falling trend in international reserves had become a cause of concern. Despite its mainly seasonal nature, the large budget deficit to that date, with the continued low non-bank take-up of official paper, was providing the basis for excessive growth in monetary aggregates, and was also providing the basis for the financing of a substantial outflow of capital. Early in November, action was taken towards tightening conditions. Increases were made in short-term official interest rates, the Bank raised the SRD ratio of major trading banks from 5 to 6 per cent and, around the same time, asked other major financial intermediaries to exercise restraint in their lending activities.

Since early 1975 trading banks had been asked to observe a policy of moderation in the growth of their financing. As part of the measures taken in early November 1976, trading banks were requested by the Reserve Bank to contain new lending rather more firmly than in the preceding months, when new overdraft approvals had been running at about $100 million per week. Banks were also asked to continue maintaining a high rate of cancellations and reductions of unused limits.

Consultations were held by the Bank with savings banks and major non-bank finance groups during the December quarter. Two major issues were put forward during these meetings. One was the expectation of a very sharp swing in liquidity within the year, presenting the need for adequate preparation to meet the rundown period. The second issue was the need for a slowing of the earlier rapid growth in financial aggregates; to this end, the Bank sought financial corporations' co-operation in moderating the growth of lending. For the savings banks and the building societies, the Bank suggested that, although there was some unevenness in housing activity from area to area, a general upsurge in their new lending for housing would be inappropriate. For finance companies and money market corporations, the Bank indicated that the pace of growth of their lending in the early months of the year was neither sustainable nor consistent with the sound development of the economy, and that there was a need for restraint in the growth of their lending.

The shortening of private portfolios in preparation for the seasonal rundown continued during November. There were further large subscriptions to Treasury notes by money market dealers as they lightened their holdings of longer dated government debt. Private sector short-term yields, which had been falling until November, rose in that month, partly in response to the moves towards a more restrictive financial environment in early November, but also because market expectations about possible downward movements in interest rates had dissipated.

With the reassessment of external policy and the ensuing devaluation late in November, need was seen for monetary policy to be further strengthened and yields on government securities were raised again, but on this occasion with increases in short-term bond yields flowing through, on a diminishing basis, to yields on longer dated securities. At the same time, a new series of Savings Bonds offering 10 per cent per annum was also issued. To ensure that devaluation was not reflected in an easing of financial conditions, added emphasis was also put on the need for an early slowing in the pace of lending by financial intermediaries. Although the Reserve Bank did not require the trading banks to observe a specific lower ceiling for lending approvals, banks were asked to exercise further restraint so as to reduce growth in their aggregate loans outstanding from its recent rapid pace.

The November 1976 devaluation was followed by an upsurge in inflows of overseas funds. To some extent, these reflected the reversal of precautionary positions earlier taken by traders to minimise their exchange risks, but the change in exchange rate expectations, the large interest differential favouring borrowing from foreign sources, and the existence of some areas of tightness in domestic financial markets, were also relevant factors. For a while, the easy availability of funds from overseas and the continuing large monthly budget deficits outweighed the effect of the rise in yields on government securities, and most private short-term interest rates fell during December and January. With the slowing of capital inflow following the measures announced on 14 January (described on p. 8) the inflow of funds into financial institutions slowed, the downward movement in interest rates was halted and private sector interest rates subsequently edged up.

In December and January, some of the liquidity arising from external transactions and from the continuing Government budget deficit flowed into short-term government paper; non-official purchases of Treasury notes were heavy, with both bank and non-bank holdings increasing strongly. To a large extent, these purchases reflected a response to firm encouragement given by the Bank to banks and other financial institutions to gear themselves to meeting the heavy rundown in liquidity over the last four months of the financial year. Some of the increase in major trading bank liquidity in the period from late December to February was absorbed by four increases, each of 1 percentage point, in the SRD ratio, taking it from 6 per cent to 10 per cent of deposits. The increase in private sector liquidity and the turnaround in the external accounts tended to moderate the demand on banks for loan finance. Major trading bank advances outstanding fell sharply in January and February, with the decline concentrated in their holdings of commercial bills.

Treasury note holdings peaked at a little over $2,800 million in February, and private sector holdings of these and other short-term government securities by then appeared sufficient to cope with the expected seasonal rundown in liquidity over the last four months of 1976/77. Issue yields on Treasury notes were reduced in December and January. Subscriptions to Savings Bonds moved to higher levels with the introduction of Series 7 on 3 December and, in the four months from December to March, net cash raisings totalled about $190 million. However, sales of other government bonds were slow in the early months of 1977 and total cash subscriptions to the February loan were relatively small.

15 Government Financing
not seasonally adjusted

The seasonal rundown was more marked this year than in other recent years because it incorporated, in addition to payment within a short period of a year's provisional tax, almost the full year's collection of company taxes. Also, the external accounts moved into deficit during this period. Financial conditions became tighter, and private sector short-term interest rates rose; for example, buying yields on 90 day bank bills rose from 9.6 per cent at end February to about 11.1 per cent at end April and, during much of the June quarter, private sector interest rates for very short-term funds were higher than those for slightly longer terms. The LGS ratio of the major trading banks fell from about 31 per cent at the peak in early March to a low point in late June of a little over 21 per cent. The bulk of the rundown in liquidity was financed by a reduction in private sector holdings of Treasury notes; these fell by $2,556 million between end February and end June.

In mid May, when the judgment appeared to be forming that sufficient provision had been made to finance the remainder of the seasonal rundown, demand by non-bank groups for longer dated government securities increased strongly. In contrast to the usual experience in a loan at that time, there were heavy net non-bank subscriptions to the May loan. Demand for bonds continued to be strong in June. The effects of several factors — the heavy loan subscriptions, large net non-bank purchases of bonds from the Reserve Bank, increased subscriptions to Savings Bonds, deficits in the balance of payments in May and June, and continuation in June of the tax off-take — put sharp downward pressure on banks' free liquidity in the closing weeks of the year, and the Bank reduced the SRD ratio of the major trading banks from 10 to 8 per cent of deposits in two steps, each of one percentage point, on 20 June and 1 July.

Lending by all major financial institutions over the last months of 1976/77, although perhaps affected by the seasonal tightness, was in general consistent with the Bank's requests for restraint. But there was some concern that lending for housing, for which demand was strong, was tending to fall below desirable levels. To provide scope for maintaining an adequate level of housing finance in the period ahead, an amendment to the Banking (Savings Banks) Regulations was announced on 26 May. This amendment removed a prospective constraint on savings bank lending for housing by reducing to 45 per cent the requirement for savings banks subject to the Banking Act to maintain 50 per cent of deposits in certain prescribed assets (mainly liquid assets and public sector securities). In consultations with savings banks and building societies in June and July, the Bank indicated that it was for individual lenders to determine the extent of their lending for housing in the light of their own deposit and liquidity experience and their assessment of the housing situation in their area of operations. Their attention was drawn to the advantages of a steady and sustainable rate of lending to the housing industry and for lenders themselves.

At the discussions, the Bank also drew the attention of lenders to the fact that the partial introduction, during 1977/78, of quarterly company tax payments would not obviate a sizeable within-year swing in liquidity. Arrangements for provisional tax payments, which can also affect the credit funds of housing lenders, were unchanged from earlier years; and substantial company tax payments would still need to be made in the final four months of 1977/78.

At the start of 1977/78, the Reserve Bank was continuing to direct monetary and banking policies, as in 1976/77, towards the overall provision of finance at a level consistent with sustainable growth in economic activity but, at the same time, contributing to the reining in of the pace of inflation.

Financial Trends and Intermediation

Public sector financing needs in 1976/77 were again large. Though the deficit of the Commonwealth Government was smaller than in 1975/76, the public sector's borrowing needs were about the same size as in the previous year largely because a sizeable part of the reduction in the Commonwealth Government's deficit was made at the expense of increases in the borrowing needs of other parts of the public sector.

The Commonwealth Government deficit for the year came to $2,740 million. As Chart 15 shows, the amount financed overseas was higher in 1976/77 than in 1975/76. Private sector financing came to about $850 million; non-banks increased their holdings of government securities by about $1,100 million while banks reduced their holdings by about $250 million. As in 1975/76, residual financing of the deficit from the Reserve Bank was again large; the amount from the Bank was $1,530 million, made up of increased holdings of Treasury bills of $450 million, increased holdings of securities of $1,050 million, and a small decrease in the Government's cash balances with the Reserve Bank of about $30 million.

Private sector Treasury note holdings showed a fall of a little over $200 million in the year — in contrast with the fall of about $1,600 million in 1975/76 — but as Chart 15 shows, holdings fluctuated substantially within the year as these securities provided the main vehicle for the management of the extraordinarily large seasonal build-up and rundown of liquidity. Holdings fell from a peak of about $2,800 million in February to around $230 million at the end of the year. Net bond raisings totalled $1,860 million in 1976/77, about $800 million less than in 1975/76, with the major difference arising from lower subscriptions to Australian Savings Bonds. Net subscriptions to these securities in 1976/77 were $366 million compared with the very high figure of a little over $1,100 million in 1975/76.

16 Private Finance — Selected Liabilities
percentage change over previous period at annual rate

As usual, much of the authorised money market dealers' activity reflected the seasonality in availability of funds. Clients' loans increased with the build-up in liquidity and reached a peak of $1,158 million late in February. Loans declined over the next two months or so and were as low as $723 million early in May. Dealers did not resist strongly this rundown in their books and average interest rates remained at about 7 per cent, equal to the average during the period of run-up. In May, however, dealers began to bid more strongly for funds, foreseeing possible higher returns on portfolios, which they strove to maintain or increase. By late June, clients' loans were over $900 million and the market's portfolio was rather larger than, in the event, proved able to be easily sustained during the end of year financial tightness. The weighted average interest rate on clients' loans outstanding over May/June was 9 per cent.

With large injections of liquidity into financial markets during the first part of the year, balance sheets of most groups of institutions expanded rapidly. Rates of increase began to slow in the middle months of the year in response to initiatives by the Reserve Bank to tighten policy and the need, which the Bank brought strongly under notice, to husband liquidity for the seasonal reflux of funds to the Government in the last four months of the year. Trends in financial intermediation during 1976/77 for some major individual groups of institutions are discussed below and summarised in Charts 16, 17 and 18.

The Bank again consulted on a regular basis with members of various groups of non-bank financial corporations to discuss matters of mutual interest. This long-standing practice was developed and extended during the year, and a beginning was made in the use of these discussions as a means of giving wider effect to the Bank's policies.

During 1976/77, there were 55 corporations newly registered under the Financial Corporations Act; statistical collections commenced in terms of regulations under the Act; in all, 362 corporations are reporting monthly and 328 are reporting quarterly statistics. The first statistical collections under the Act were published in November; some of the information for 1976/77 in Charts 16 and 17 is derived from the new collections.

Total deposits with major trading banks rose by 12 per cent between June 1976 and June 1977, a little less than in the previous twelve months. Growth was particularly rapid in the first half of the year with deposits growing at an annual rate of about 30 per cent (about 18 per cent seasonally adjusted). Over 1976/77, fixed deposits were the fastest growing component of trading bank liabilities; they grew by 18 per cent from June 1976 to June 1977. Issues of certificates of deposit, which had been declining since mid-1974, fell further in 1976/77. Current deposits increased by 6 per cent. The proportion of fixed deposits in total deposits thus increased over 1976/77; in June 1977, fixed deposits were 55 per cent of total deposits compared with around 35 per cent in June 1974; by contrast, certificates of deposit accounted for only 4 per cent compared with 20 per cent of total deposits three years earlier. These movements reflect to a large extent relative interest rates; issue yields for certificates of deposit were, as in 1975/76, below the maximum rate for fixed deposits for all but the June quarter of 1976/77.

Growth in savings banks' deposits was slower in 1976/77 than in the previous year. Savings banks' deposits totalled $16,372 million at end June 1977 and were 10 per cent higher than in June 1976; this compares with a rise of 15 per cent in the previous year. Investment accounts and deposit stock again accounted for the greater part of the growth in deposits; at end June 1977, these represented about 37 per cent of total depositors' balances with savings banks, compared with 18 per cent in June 1974, 31 per cent in June 1975 and 35 per cent in June 1976.

Permanent building societies experienced a rapid inflow of funds in the first half of the year; this enabled societies to raise their liquidity from the uncomfortably low levels of the second half of 1975/76. Although the pace of growth in their balance sheets was slower over the second half of 1976/77, the increase in withdrawable funds over the full year amounted to $1,300 million, a rise of 28 per cent compared with 20 per cent in 1975/76.

Finance companies' borrowings from the general public expanded strongly, by some 20 per cent, over 1976/77. Within the year the rate of expansion was faster in the first half; seasonal liquidity tightness and other factors worked to slow the rate of expansion in the half year to June.

Outstanding borrowings of money market corporations also expanded quickly in the first half of the year but as liquidity tightened, borrowings from banks and other residents fell, reaching a minimum in April. Over the year as a whole, there was little change in these corporations' overseas borrowings. Total borrowings of this group of institutions are estimated to have increased by around 13 per cent in 1976/77.

There was little change in the average weekly level of new and increased lending commitments by major trading banks during the early months of 1976/77 from levels recorded over the last few months of 1975/76; new overdraft approvals averaged a little over $100 million a week in the nine months ending in mid November. Following the moves to restrain lending further in November, the level of new overdraft lending fell to average about $89 million a week in the four months to mid April. In the last three months of the financial year, reflecting mainly seasonal pressures, overdraft approvals rose to a weekly average of $97 million.

Cancellations and reductions of major trading bank overdraft limits were, as requested by the Bank, maintained at high levels through the year. Aggregate overdraft limits, which (in seasonally adjusted terms) had been increasing by around $40 million a week in the first half of the year, showed little net change in the three months to mid April, then rose by about $20 million a week in the ensuing three months. Overdrafts outstanding moved in sympathy with limits in the first three quarters of the year, but, in the final quarter, the proportion of limits used rose more than seasonally. Loans, advances and bills discounted outstanding grew at a seasonally adjusted annual rate of almost 20 per cent in the first half of 1976/77; this growth rate was high in part because of the refinancing by banks of bills previously held by the Reserve Bank. With a steep fall in the holdings of bills, the total of loans, advances and bills discounted outstanding moved down at an annual rate of about 10 per cent in the March quarter, when additions to liquidity from inflows of foreign funds and the Government budget deficit were large. In the June quarter, advances grew at an annual rate of 12 per cent and, in June 1977, advances outstanding were $12,177 million or 11 per cent higher than a year earlier. Demand on banks for funds by the household sector was strong, and the amount outstanding for personal instalment loans and charge cards rose strongly during the year.

17 Private Finance — Selected Assets
percentage change over previous period at annual rate.

Trading banks' activities in new bill financing were covered by the Bank's request for moderation of lending, and the pattern of movement was broadly similar to those for other aggregates described above. After a sharp growth in acceptance/endorsement limits outstanding in the first half of the year, there was only a moderate increase in the second half. A similar movement took place in discount limits outstanding. In the course of 1976/77, acceptance/endorsement and discount limits outstanding rose to $2,702 million (up 12 per cent) and $623 million (up 15 per cent) respectively.

The very strong demand for housing finance continued throughout 1976/77. With housing activity Australia-wide early in 1976/77 at levels where capacity, at least in some areas, was a constraint, the Bank was concerned that there should not be a general upsurge in the level of housing lending, and cautioned lenders accordingly. In fact, the total value of finance approvals for housing by banks and permanent building societies decreased a little in 1976/77, as did also the number of finance approvals. The relative decline in the number of approvals was a little smaller for new housing and the proportion of total approvals (both in number and value) going to new housing increased for the first time since 1970/71.

In the early part of 1976/77 savings banks' housing lending approvals continued at high levels. Lending by permanent building societies was initially at reduced levels because of their need, at that time, to rebuild their liquidity, but reached a high rate by mid year. As 1976/77 developed, with first the prospect and later the emergence of tighter financial conditions, savings banks lent at a slower pace in the second half of the year while lending by building societies, which had increased rapidly in the first half of the year, levelled off in the second half. For 1976/77, lending approvals for housing by savings banks and permanent building societies totalled $2,132 million and $1,650 million respectively; this compares with $2,208 million and $1,651 million in 1975/76.

With funds readily available in markets early in the year, lending levels for both finance companies and money market corporations were high. Later in the year, funds became less readily available. Although some decrease in finance companies' new lending and growth of loans outstanding appeared to be taking place toward the end of 1976/77, their new lending remained at high levels. In their consultations with the Bank, finance companies had pointed out their difficulties in quickly reducing the growth of outstandings because of forward commitments. Money market corporations' loans outstanding rose quickly up to November, but subsequently began to decline largely because of a switch to holdings of government securities. As liquidity tightened in the June quarter, these holdings were reduced while loans outstanding grew strongly again.

18 Private Finance — Interest Rates

The major trading banks' margin of free LGS assets was generally kept at low levels in 1976/77. In the first part of the year, demand for bank finance, as the Reserve Bank's holdings of commercial bills matured and international reserves moved down, pressed towards expansion of lending rather than a build-up of liquidity. Until the end of March, the higher ratio for the LGS convention of 23 per cent temporarily adopted from February 1976 acted to restrict the level of free liquidity. In anticipation of heavy seasonal needs in the June quarter, the trading banks built up substantial liquid holdings in the form of Treasury notes, notwithstanding the series of calls to Statutory Reserve Deposits mentioned above. The increase in banks' free liquidity following the return of the conventional minimum LGS ratio to 18 per cent on 1 April was quickly eroded by seasonal outflows of funds to the Government. The LGS ratio, after peaking at an average of 30.3 per cent in March, fell to 21.5 per cent in June, about 2.4 percentage points lower than in June 1976 (when the effective minimum ratio for the LGS convention was 5 per cent higher). At some points in the rundown period, particularly during the last weeks of June and early July, trading bank liquidity was very tight; at times, individual banks eased their positions, in part, by borrowing from others in the developing interbank lending market.

With advances outstanding, particularly for housing, rising strongly, the ratio to deposits of holdings of prescribed liquid assets and public securities by savings banks in 1976/77 remained below levels recorded over 1975/76. There was a further decrease in the tight June quarter, when savings banks reduced their deposits with the Reserve Bank and holdings of government securities; for the year as a whole, holdings of government bonds fell by $164 million. As usual, savings banks made large investments in local and semi-government securities and holdings of these rose by $568 million in 1976/77. By end June 1977, savings banks' ratio of liquid assets and public securities was 54 per cent compared with 57 per cent twelve months earlier but, in the meantime, the prescribed asset ratio was lowered from 50 per cent of deposits to 45 per cent.

Three amendments to the Savings Banks Regulations were promulgated during June. These served to widen the range of security that subject savings banks can accept against loans to official dealers in the short term money market; to make loans to the Australian Banks' Export Re-Finance Corporation eligible investments within the 45 per cent group of assets; and to clarify the status of registered stock issued by the Australian Industry Development Corporation as an eligible investment (also within the 45 per cent group of assets).

The ratio for permanent building societies of liquid assets to withdrawable funds rose rapidly in the first months of the year from the low levels of the second half of 1975/76. At the end of December 1976, holdings of cash, bank deposits and Commonwealth Government securities represented around 17 per cent of withdrawable funds. A further rise was recorded in the two months to end February but, with the onset of the period of seasonal tightness in March, there was a decline in the ratio to around 14 per cent at end June 1977 compared with about 12 per cent a year earlier. Holdings of liquid assets by other financial institutions were built up in the first half of the year and were generally adequate to maintain operations during the period of seasonal tightness with generally no more than moderate increases in short-term interest rates in private markets.