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Have your say: RBNZ's Bollard reads riot act to banks, councils and power companies
Reserve Bank of New Zealand Governor Alan Bollard has sent an unusually strong message to banks, local governments and electricity companies that they should help the economy recover by lowering profit margins and restricting price increases to contain inflationary pressures and pass on the benefits of a lower Official Cash Rate.
"Everyone needs to play their part," the Reserve Bank said in releasing the speech to the Wellington Chamber of Commerce.
Further monetary policy easings depended on all sectors of the economy responding to reduced demand and not adding inflationary pressures to the system, Bollard said in the speech available here.
"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 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," Bollard said.
"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," he said.
"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."
Bollard said that with substantially lower commodity prices, there was 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," Bollard said.
What I think
It's great to see the Reserve Bank Governor is still focused on his primary target -- low inflation. Bollard is right to target the banks, power companies and local councils.
The banks were focused on keeping margins strong to generate profits and bolster their balance sheets in a volatile environment. Bank safety is paramount, but things have changed since mid October. The Reserve Bank is now lending large chunks to the banks and the government has given the enormous benefit of a government guarantee.
It makes sense to pass on the benefits in the form of lower business overdraft rates and lower variable mortgage rates. This will encourage peoplel to drop their fixed rate mortgages, which is a good thing for monetary policy. I'm less sure about credit cards. They are at the riskier end of the spectrum and consumers should not be relying on credit card debt to survive.
Power companies have been extracting oligopoly profits for at least 5 years and the new government should do its best to exert some control. Local governments have been even more egregious in forcing big rate increases through to fund both high wages and employee growth and big infrastructure spending.
Councils and the government have to come up with new ways of funding this infrastructure. In the meantime these crazy rates increases have to stop.
Your view?
Is Bollard right to target these players or should he just be cutting rates to get the impact he wants?
Is the jawjaw just a waste of time? Does he risk crying wolf?
Comments below please
29 Comments
I think more than a
I think more than a few businesses will be bewildered as to where Bollard sees these fat profit margins coming from. Especially after we've just seen the biggest quarterly rise in import prices in a quarter of a century.
Isnt it time John Key
Isnt it time John Key and his elected associates got involved.Why leave it all up to our Dr Bollard.How come the faceless thieves can do what they want ,without any responsibility or accountability.Shame, Shame, Shame ,you fat cats.
I think its pretty obvious
I think its pretty obvious now that using interest rates as the primary mechanism to control the economy (or global economy for that matter) is totally flawed.
The lowering or raising of rates both have unintended negative consequences - its a double edged sword. Overall its too blunt an instrument and Bollard targeting banks may in the short term have some positive effect on the economy but ultimately its not the symptoms that need treating.
The fractional reserve banking system along with the private banking system needs replacing with a public finance based system (or better regulated private system) that is sustainable and fairer to tax payers,borrowers and savers, rather than the greedy self-interested banks and large corporations who are totally reckless with *our* hard earned money.
Yeah - and how come
Yeah - and how come taxi drivers haven't dropped their exorbitant charges - or public transport?? I f we want another round of rate cuts we have got to get these charges down.
Have to say also that
Have to say also that as the regular supermarket shopper in this family, lots of prices went up, probably justified by the increase in oil prices but they dont seem to have come back down, funny that.
Isn't there meant to be a watch dog like Consumer keeping an eye on this.
The lower cost home brands must be making significant inroads.
Some are pretty good buys if you know what to look for as they are usually produced on the same production lines as the branded products.
Milk is the perfect example, homebrands usually around $3 for 2 litres compared with over $4 for the branded products.
AB's warning is like giving
AB's warning is like giving a pass mark to all high school students and then asking them to study hard because they got a pass!
And dairy products seem to
And dairy products seem to be on the increase.Why?All the government depts are still shell shocked that their 9year honeymoon with the inept and inane Labour Party is at an end.Comcom has put all the profiteers in the too hard basket.Fair trading have fled .and TV ONE ARE IN A COMA,TO REPORT THE TRUTH.I REITERATE AGAIN GOVT DEPTS Labour lost Nats won eat that.
price gouging by monopolies is
price gouging by monopolies is nothing new but what is new is the governor of the reserve bank giving them a rev up.I had him down as another creeping jesus type in the rod deane mould but maybe he is action man in a grey suit.
sam, you deserve a 'scholarship'
sam,
you deserve a 'scholarship' for that precise and yet colourful observation of our state of affairs...
Bollard jawboning on inflation... So
Bollard jawboning on inflation...
So that is at least three tools he has in his toolbox
a) interest rate lever
b) jawboning.
c) providing short term funding to the local banks who cannot rollover overseas funding
What I would like to know is what power does he have to back his jawboning up? I don't think his jawboning would be a major factor for me if I was considering putting prices up.
As far as I know the RBNZ has been emasculated with respect to what tools it can use.
And I'm wondering whether Bollard is fighting the right war? Will the problem be inflation? Will it be deflation? Will it be another debt frenzy? And even if he does identify the right war to be fighting will he have any tools that will allow him to have an impact?
Ross Gittins is another economic commentator who seems to be getting on the debt bubble theory... http://business.smh.com.au/business/its-not-inflation-that-did-us-in-its...
In terms of expenditure, local
In terms of expenditure, local athorities have to provide water, safe housing, transport networks, somewhere to flush the loo, parks and sportsfields for us to keep healthy.
Why cut down on these first? Surely cuts to alcohol, partying, widescreen tellies and that kinda thing is a better thing to do. Anyway, our rates at $1500/annum are one of our lowest monthly expenses. And we get to live in a clean and healthy place with roads to get to work, and I really like the flushing loo!
SAMANTHA wellington are you JILL
SAMANTHA wellington are you JILL wellington's big sister?
Speaking of riots; http://www.stuff.co.nz/4789023a12.html "Wedne
Speaking of riots;
http://www.stuff.co.nz/4789023a12.html
"Wednesday's strike by GSEE and its public sector counterpart ADEDY, which group half of Greece's 5-million-strong work force, was the latest in a series of labour protests against privatisations, pension reforms and the rising cost of living.
"Take your hands off our rights!" chanted a group of 50 people who marched through Syntagma square outside parliament with a banner reading: "The rich should pay for their crisis".
Note : Protests against privatisations, pension reforms and the rising cost of living. It bears thinking about.
Hi digitally reborn,i am the
Hi digitally reborn,i am the ghost of Christmas past,and you seem to have reincarnated yourself.cheers .
Samantha some one wants to
Samantha some one wants to know are we related?I suppose the same way and association as JOHN KEYrelates to MICHAEL CULLEN.
Local bodies exponentially increased their
Local bodies exponentially increased their rates in line with the exponential increase in capital values. Now with falling capital values these protected bureaucrats still want increases.
Auckland City and Regional rates up 150% in 10 years.
These bureaucrats are disconnected to real peoples economic expectations. Who needs two arborists reports before you prune a tree on your own land, only the bureaucrat and his arborist mates. Who needs $5000 of engineering plans and permissions to make a crossing over a footpath, certainly not the property owner and his concreting contractor. These are so called `user pays` charges, `abused pays`would be more honest.
Go Alan
I consult to the local
I consult to the local government sector in the management of infrastructure. At one time or the other half the local authorities in New Zealand have been clients. Many local authorities are entering sustained (next 20 years) and wide ranging infrastructure replacement cycles. For many, additional depreciation charges (which must be funded) will match inflation, without funding anything extra - new capital etc. For many communities this is the first time they have had fully fund the cost of this infrastructure - as much of it was originally built with the assistance of government subsidies in the 1950's - 70's. I agree with the analysis that local government needs alternative revenue arrangements to fund infrastructure (long term low interest government guaranteed bonds perhaps). I really do wonder where the many local authoriites could cut rates without deferring infrastructure expenditure. We did this as a country in the late 1980's and early 1990's. We are still paying the price in backlog catchup. All this does is increase the cost (more reactive/expensive maintenance) and transfer the cost forward to the next band of ratepayers. The problem of replacing essential infrastructure to maintain public services does not go away. The only questions are who is going to pay, when they are going to pay, and how they are going to pay. Despite widespread opinion to the contrary, local government in New Zealand has spent the last 2 decades becoming progressively more efficient. Much of the physical service delivery is contracted out, and market tested. Most new construction is subject to the same discipline. So where are the savings going to come from - the majority of big ticket expenditure is already market tested.
Why not get Bollard to
Why not get Bollard to centralise and direct everything... Who doesn't like whining about prices? But despite people's populist perceptions, whenever a govt inquiry into prices is set up, it always seems to come back with the 'prices are justified' result.
The biggest problem with Bollard's
The biggest problem with Bollard's complaint is one of omission. For every firm in a non-competitive sector that is keeping their margins comfortably fat, there are probably ten firms in competitive sectors that are on the bones of their backsides - why else would they be laying people off left right and centre? They've had to absorb a relentless rise in the costs of doing business over recent years, which has helped to keep inflation lower than it would have been otherwise - and Bollard has been happy to claim the credit for it. Now those margins are reaching zero or less, and Bollard is telling firms that if they accept even bigger losses then they might get a small reduction in their interest bill. I think they're well within their rights to tell him to get bent.
Hello all, I am just
Hello all, I am just a mere enforcement officer at a LA who visits this site as he is hoping to find out when GBP/NZD rates are going to get in his favour so he can get his hard earned savings back from the UK saved during my OE. I am no economist, nor am I fiancially trained, but I must say that I find the continual attacks on Local Government very frustrating.
What I find even more interesting is the economist [high media profile] that has been visiting Councils around the lands telling them not to stop spending as it will cause a problems with the local economys. I certainly know my neighbour a landscape contractor is very nervous about the slashing that has been going on here as at the end of the day we would be his stable bread and butter clients that helps him maintain his group of young staff.
Other issues is the funding mechanisms under the LGA and RMA has resulted in a few issues in having to depreciate assets and collect Development/Financial Contributions. We are still finding assets that we did not know that we had due to corner cutting etc in the past that now we have to pay the depreciation on, this means that the bill gets bigger, yet we actually have not even done anything. We may not even want to replace them when their design life is over, yet we have to put the money aside just in case.
As for DC's, not a bad concept, but the issue is you put the capital works into the 10 year plan, yet the RMA provides for subdivisions to take place over 8 years [5 years to get 223 and 3 years to get 224]. So you can only claim for works in a 10 year period, yet the development may not be finished for up to 8 years when you collect the money, so who funds things in between? One solution is to claim the DC's up front, or part thereof.......the developers are going to love that although it may keep the anti development people happy as it will surely put a damper on development if you have to pay a 1 million up front before you even start digging.
On top of that, Central Government continues to apply new duties and requirements upon Local Authorities aka the building accreditation and now we are being told to not put up the rates.........hmmmm
I personally do not mind paying my 40 dollars a week as I certainly get a lot more for us than I do from my phone company and television provider.
Something is going to have to give. Maybe it is simple ecology at work, population stress etc etc
I would make one salient
I would make one salient point in respect of central bankers.
Note what they do and ignore what they say.
Follow the money not the rhetoric.
Interesting isn't it? Ask any
Interesting isn't it?
Ask any local mayor and they will tell you their costs and responsiblities have ballooned over recent years due primarily to central government policy changes. Plus the need for infrastructure work that is long overdue.
Well done Governor Bollard - he is simply pointing a finger at where he sees unresolved problems that make his job harder. If you look back he has been stimulating debate on the issues that cause him difficulty on a regular basis.
As I see it we have a case of lack of accountability of central government creating legislation that creates costs they do not have to pay on the one hand, which seems to me irresponsible.
On the other hand we have what is effectively an electricity tax. The electricity industry is a major revenue earner which the government runs as a profitable monopoly (in that it makes the rules and profits from them). There is not necessarily anything wrong in this.
maybe bollard is frustrated like
maybe bollard is frustrated like bruce sheppard and gave everybody a spray,he knows the sky actually could be falling and nobody is listening.hard not to bitch about QV though when they jack your land value up to increase your rates,there has been more sightings of Elvis than genuine property buyers in this neck of the woods.
Alan, I thought that the
Alan, I thought that the total rates gathered is fixed by forecast expenditure and how that is gathered is proportional to the QV of the property/land. Jacking up the QV does not change anything unless yours goes up or down relative to everyone elses. Correct me if i am wrong.
Are Council's profit making organisations? Do they pay out dividends?
I am presuming that the banks shareholders will not be impressed with Mr Bollards statements.
Even though Dr AB tried
Even though Dr AB tried to buffer Xmas consumer crash with his heading out of recession comments last week as he gently eases NZ into the new reality we are faced with, he obviously suspects/knows what is coming in 2009!
It`s difficult to convince monopoly organisations whose `exectives` are paid homesomely to rort the public to maintain firstly their salaries and secondly give returns to shareholders when times are good.
When increasing numbers become aggrieved and desperate the turmoil begins when this mass gets too great ....NZ suffered riots in Auckland years ago when people became aggrieved and desperate or has that been forgotten?
Note what is happening in Greece..it is a serious wake up call... then flick your mind back to Russia 1915 or to China`s post war upheaval.......
Read widely and you will realise trouble is brewing everywhere....e.g. Unions have no power in Japan as there is little open argument but it is interesting to see aggrieved sacked workers banding into new unions and becoming vocal
Financial destruction and injustice leads to social destruction...
The people Dr AB is pointing at need to look out of the window at what is happening in the wider world and ponder....
paul,they increased my land value
paul,they increased my land value by 250% when the average was 88%.
Alan, I guess that is
Alan, I guess that is the problem for having a valuable piece of land. In balance there must be someone in your area that has less rates to pay as a result of your increased contribution. I guess the QV system is a double edged sword, everyone wants their place worth more, but no one likes to pay more of their share which is way the system isin NZ, tax the rich and give to the poor [rates rebates for the old].
We are heading towards captial value rating here......now that will annoy a very lucky few, yet please a large amount of the not so lucky.
Tonz, we have developers going under at an alarming rate in this area, started about 6-8 months ago, the banks and finance companies I deal with are not that good at land development so we will have to see how they do. I hope you are refering to the front window as there is a small bright light fast approaching. Cheap sections via firesales are only going impact house proces further, let alone all the other stuff going on in the world. I view the results of greed on a daily basis.....problem is there are generally real people stuck behind it all.
I view the world as an ecologist, we are no different from any other animal except we have this fine coat of what we called intelligent/civilised society smeared across our faces. I am sure financial matters will follow the same prinicples somewhere along the way. Population stresses go up, effects are felt, I just hope that it is not my fecundity that gets impacted...fecundity is certainly a good way of measuring ones biological fitness. Maybe the same goes in the business world.... aka negative growth for a while before we hit some balance poitn again?
Must qualify this as I am but a simple man with no financial training or skills, just an opinion.
well thanks for another lecture,you
well thanks for another lecture,you miss the point again,we have lived out in the wops for 16 years and have kept pace with everyone else.we dont live on the beach,we have tank water and a septic tank.we have tried to sell our property over the last six years and cant get anywhere near their valuation.sorry I only used one paragraph to make myself understood.
My appoligies Alan, I was
My appoligies Alan, I was not trying to lecture you. I am sorry my posts are too long. I am sorry you are having problems selling your property. I am sorry for your high QV valuation. I did not understand your situation from your earlier posts. I have not tried to offend or upset you.
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