Start cutting your prices, Bollard tells companies

Power companies, oil companies, local councils and banks have all been given the hard word by Reserve Bank Governor Alan Bollard who says that there is room for new price cuts.

In a speech given today, Bollard warned that "all sectors need to do their part" to ease inflationary pressures if interest rates are to fall further.

As the global financial crisis tightened its grip in the second half of this year, Bollard responded with ever larger cuts to the official cash rate (OCR), culminating in a record 1.5 per cent reduction last Thursday, taking the rate to 5 per cent.

Speaking in Wellington today, Bollard said that with substantially lower commodity prices, there was room for further price cuts.

Banks should not look to maintain high profit margins in the current environment and retail margins "could be expected to reflect lower costs" and the current tight environment.

"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."

"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," Bollard told a 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 year, consumer price index inflation reached 5.1 per cent, the highest rate since 1990, Bollard said.

The higher rates of inflation were broad-based, with common drivers including 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.

Since July the Reserve Bank cut the OCR by 3.25 per cent. Short-term mortgage rates had been cut, "but not by that much", said Bollard.


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