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Eyebrows were raised this week when the Reserve Bank Governor castigated banks, oil companies and food manufacturers for not bringing down prices as much as they should. In a speech entitled "Everyone needs to play their part," Alan Bollard also told power companies not to keep pushing up
prices and chastised local bodies for not keeping rate rises under the level of inflation. It was a sweeping assault aimed specifically at ensuring inflationary pressures continue to be dampened. More broadly, however, it was a welcome marker in a time of extraordinary economic stress.
Some of those criticised by Dr Bollard were quick to fire back. One or two had more reason than others. But the response from the Auckland City Council and the banks suggested that, at least in their cases, the governor's attack had been witheringly accurate. Most lamentably, councillor Doug Armstrong suggested Dr Bollard was wrong because Auckland City had managed to keep its rate rises within the "council rate of inflation". The only problem is that this year's council rate, the basis for rates and water bill increases, is 5.1 per cent. Over the past three years, the official rate of inflation has averaged just 3.2 per cent. As Dr Bollard suggests, councils have got into the habit of passing on big increases and not thinking too deeply about it. It is not, after all, their money.
The banks, also, had no valid comeback to the governor's surprise at not seeing more "pass-through" from the Reserve Bank's slashing of the official cash rate. Short-term mortgage rates have been cut but not by as much as the OCR reductions. The banks, variously, attributed this to the increased cost of borrowing overseas, a wish not to reduce deposit rates by a similar rate, and Government charges for the bank deposit guarantee scheme.
To heap blame on a scheme funded by the taxpayer for the good of the banking sector is ungracious, to say the least. So, too, is the lack of any acknowledgment that banks happily extracted huge profits before the United States sub-prime mortgage crisis bit. According to accounting firm KPMG, the big banks made combined profits of $4.8 billion before tax last year. Dr Bollard says they cannot expect to maintain high profit margins in the current environment. Asking them to come to the party seems particularly reasonable, given the underpinning they have received from the taxpayer.
Other industry sectors have not received such largesse. Some also point to an inherent conflict between Dr Bollard's wish and their responsibilities to their shareholders. But most companies will, in any case, be wary of lifting their prices for fear of losing out to competitors. Those who do and suffer for it will, ultimately, have served their shareholders badly. Dr Bollard has, of course, spent the past few years delivering stern and unpalatable messages. His entreaties to householders about their ongoing spending spree went largely unanswered. So, too, did his message to banks that some of their lending practices were rash. Now, his cutting of the official cash rate seeks to prise open people's chequebooks. There may be difficulties there, too, because many are worried about losing their jobs.
It will take even longer if the councils and companies targeted by Dr Bollard do not pull their weight. He will find it hard to keep cutting interest rates if there is no evidence that inflationary pressures are reducing significantly across the board. If such were the case, a vital stimulus would be lost. That would hinder not only economic recovery but the profitability or performance of each of the enterprises targeted by Dr Bollard. They have a vested interest in playing their part. They should heed the governor.