Bollard wants banks to 'share the pain', but won't direct cuts

Reserve Bank Governor Alan Bollard has reiterated to New Zealand's big banks he wants to see them "share some of the pain" of the recession by passing on "a good part" of recent falls in wholesale rates to all types of customers. He also said the OCR would not come down "a huge amount more." "That's just a message they need, to bear some of this pain as well," Bollard told Radio New Zealand in a report broadcast on Friday. "The economy is under some stress. It's not easy for banks at the minute. It's expensive and difficult for them to borrow in the Commercial Paper markets, but nevertheless they can't use this cut in the OCR to build up their own margins," Bollard said. On Thursday the Reserve Bank cut the official cash rate by 150 basis points to 5% and took the unusual step of calling on the banks to "play their part" in passing lower wholesale rates on. Asked if this meant he expected banks to sacrifice profits, Bollard said: "What happens to their profits will depend on their business strategies and how much lending they do. Here we are pushing down one of the prices at the wholesale level and we'd expect to see a good part of that passed on." Asked which rates he'd like to see banks cut, he said: "I can't answer that. There's such a mixture of rates out there for different time periods. Even amongst the banks their balance sheets are quite different and their costs of funding are quite different." Bollard also declined on Thursday to specify whether business, farming, housing or credit card rates needed to drop. "We're not trying to be prescriptive about this," he told the news conference.  Bollard said he sympathised with savers seeing interest rates falling, but that rates were higher here than in other countries. "They should look at what savers have been getting in Japan for the last 10 years and think they are in the right place for incentives to save," Bollard said. Bollard said the deterioration in the global economic and financial situation in the second half of 2008 had been surprising, forcing the unusually large rate cuts in recent months. "If you'd told me in July we'd have to do this (cut by 150 basis points) I wouldn't have believed you. What's changed is the international environment and we're now in the world where the G7 members are all in stagnation or recession and that has changed massively," Bollard said. He repeated his comments from Thursday that New Zealand is coming out of a shallow recession. "We're in a slightly funny and different position than the rest of the OECD. We went into a very shallow recession right at the beginning of this year. Some of that was housing coming off and some of that was drought. That was enough to push us into a very shallow recession for 3 quarters. Actually we think we're coming out of it now. We think we're out of it already, but only to a very, very shallow recovery. It's mid to late next year before we see some robust growth," Bollard said. "It does mean a bit of hunkering down, but I don't think New Zealand is in too bad a position. We do have Australia. We do have East Asia and they're the better parts of the world." Speaking about the OCR and interest rates generally, Bollard said: "Our forecast is that rates would come down a little more but not a huge amount more." * This article was first published yesterday in our daily subscription newsletter for the banking and finance industries. The email costs NZ$365 per annum and carries exclusive news and analysis for New Zealand banking and finance industry executives, regulators and investors. Sign up for a free trial here.