Reserve Bank Governor Alan Bollard said today that further monetary policy easings depend on all sectors of the economy responding to reduced demand and not adding inflationary pressures to the system.
"We need to see inflationary pressures reducing significantly across the board, if we are to keep on easing monetary policy, thus helping the New Zealand economy to recover," Dr Bollard told a Wellington business audience.
"With a global economic slowdown, for some commentators, concerns over inflation appear to have taken a back seat. Many commentators are of the view that lower commodity prices and weak economic activity will drive inflation significantly lower.
"It is worth remembering that for the moment, however, inflation rates in New Zealand remain very high. In the September 2008 year CPI inflation reached 5.1 percent, the highest rate since 1990. The higher rates of inflation are broad-based.
"Common drivers have been: strong world commodity prices; domestic capacity pressures due to demand; and sizeable price increases in areas not directly exposed to a high degree of competition, such as local authority rates and electricity prices."
Dr Bollard said that with substantially lower commodity prices, there is room for further price cuts. Retail margins could be expected to reflect lower costs and the current tight environment. He also noted that banks should not be looking to maintain high profit margins in the current environment. Since July the Reserve Bank has cut the Official Cash Rate by 3.25 percent. Short-term mortgage rates have been cut, but not by this much.
"We would hope that the electricity industry does not take advantage of its market position and keep increasing rates, that local authorities realise they need to set rates increases below inflation for a change, that the construction materials industry respond to much weaker demand, that the food industry react to lower international commodity prices with price cuts, that petrol companies keep cutting forecourt prices, that the transport industry pass on fuel price cuts, and that the banks pass on interest rate cuts. Only then will all these firms be playing their proper role in New Zealand's recovery."
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