12 Jun 2009

Bollard 'using all powers' to get bank rates down

5:22 am on 12 June 2009

Reserve Bank Governor Alan Bollard has told MPs he is using all powers available to get banks to lower interest rates, after earlier leaving the Official Cash Rate unchanged.

Dr Bollard appeared before Parliament's Finance and Expenditure Select Committee on Thursday, hours after holding the Official Cash Rate at 2.5%.

The committee has criticised banks for not passing on cuts to the benchmark interest rate, which has fallen 5.5 percentage points since June 2008.

Dr Bollard told the committee he expects the Official Cash Rate to stay at or below current levels and he expects retail banks to lower their rates.

He said the powers available to him relate only to the stability of the banking system and he is unaware of any extra tools available to central banks that would enable them to force retail banks to lower margins.

He also suggested banks should have to explain themselves to Parliament.

Signs of recovery

Thursday's monetary policy review was the first time the benchmark lending rate has been left on hold for 12 months.

Dr Bollard cited recent signs of stabilisation in the world economy and maintained the bank's predictions for the New Zealand economy to begin growing at the end of the year.

But he said the high dollar and rising longer-term interest rates remain threats to the recovery.

He said there is potential for a rebound in household spending and residential investment. However, the bank does not think it would provide sustainable given the soft outlook for employment.

Dr Bollard said the bank considers it appropriate to continue to provide substantial monetary policy stimulus to the economy and the cash rate could still move modestly lower over the coming quarters.

When Dr Bollard's deputy, Grant Spencer, appeared before Finance and Expenditure Committee last month he told MPs that margins on floating and short-term fixed rates were as high as he could ever remember.

Auckland University economist and competition expert Tim Hazledine says there should be an investigation into the banks.

Dollar rises

The dollar rose after the Reserve Bank announcement.

In a move that will not please exporters, the dollar jumped three-quarters of a cent to nearly 63.5 US cents.

Goldman Sachs JB Were strategist Bernard Doyle says the Reserve Bank is playing a careful balancing act, not wanting to increase household borrowing or set the economy up for another fall.