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Inflation pressures slow to abate, Bollard says

Wednesday 10th December 2008

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New Zealand's economy still has pockets of high inflation that haven't responded to the steep series of interest rate cuts and sliding prices for commodities, according to Reserve Bank Governor Alan Bollard.

Short-term mortgage rates offered by banks haven't fallen as much as cuts to the official cash rate would imply, costs for utilities and local body rates have climbed and there's more room for prices of petrol and food to decline, Bollard said in a speech to the Wellington Chamber of Commerce.

"Many commentators are of the view that lower commodity prices and weak economic activity will drive inflation lower," Bollard said. "It is worth remembering that for the moment, however, inflation rates in New Zealand and many of our trading partners remain very high."

The consumer price index peaked at 5.1% in the 12 months through September, an eight-year high and outside the central bank's 1% to 3% target range. Bollard last week slashed the official cash rate by 150 basis points to 5% to revive a shrinking economy and predicted inflation would fall back to within the target range by the middle of 2009.

Bollard said the scope for further rate cuts would be enhanced if there were signs of a wider reduction in inflationary pressures and prices.

"We need to see inflationary pressures reducing significantly across the board if we are to keep on easing monetary policy," Bollard said.

Increases in local authority rates "have run well in advance of overall CPI inflation" for a number of years, while cost increases have been particularly noticeable among electricity utilities, he said. Banks could also narrow their profit margins by passing on more of the benefits of a lower cash rate, he said.

"Banks should not expect to be able to maintain high profit margins in the current environment," he said. For dairy prices, "now that global prices have crashed, there is plenty of room for retail price cuts," he said.

By Jonathan Underhill



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