Everyone needs to play their part

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."

You can read the speech at the following link:
http://www.rbnz.govt.nz/speeches/3509648.html