Bollard concerned about "very nasty" inflation building globally

Alan Bollard has testified in front of Parliament's Finance and Expenditure Select Committee in Wellington on his decision to cut the Official Cash Rate by 0.5% to 3%. The following comments were made over a 35 minute hearing, including a surprisingly hawkish statement about a "very nasty" global inflation problem building up because of heavy money printing and deficit spending in Britain and the United States. Bollard recapped on the decision and reiterated that New Zealand can't cut the OCR below 2% because New Zealand needed to be careful about having a high enough interest rate to encourage international investors to keep funding our current account deficit. Committee chairman Craig Foss asked about the Governor's comments on interest rates not getting down to "near zero" and whether New Zealand can go below Australian rates. Bollard said the current differential (NZ on 3% and Australia on 3.25%) didn't make too much of a difference, but New Zealand wouldn't want to get too far away. What about a quantatative easing, Labour Finance Spokesman David Cunliffe asked. "We've put a small toe in the water with the TAF (Term Auction Facility) and the way we've got a cashed up system for overnight funding. We're watching what the Bank of England and the Federal Reserve are doing,"  Bollard said. Bollard was asked about inflation and was surprisingly hawkish in his answer. "I think the world is building up to a pretty nasty inflationary situation in a couple of years," Bollard said. "Internationally there is a big problem, but here we don't see it here, at least for now," he said. Asked if mass money printing and government deficits were creating inflation globally and whether other central banks and governments should be worried, he said: "Ultimately yes. They should be starting to get concerned about that." Asked if all of today's cut in the OCR should be passed on in lower variable mortgage rates, he said: "At the floating rate end we'd expect most of that to go through." Bollard also talked about the Term Auction Facility that allows the Reserve Bank here to provide funds for banks through lending against securitised mortgages. He described this treatment as a type of "dialysis" for banks rather than the full organ and blood transplants that overseas banks are getting. He later said: "Can I withdraw that analysis and use a flu jab one instead." That tickled the committee's funny bone. Asked if the bank had been slow to cut rates last year, he said: "From hindsight, we were slow to pick the depths of the global downturn and had we done that we would have cut a bit beforehand, but we did cut in July, which was before the rest and we did get panned for it at the time, so that's not playing on my conscience too much."