alan bollard : everyone needs to play their part – inflation and recession in the new zealand economy speech by dr alan bollard, governor of the reserve bank of new zealand, to the wellington chamber of commerce, wellington, 10 december 2008. * * * the world economy faces some significant challenges. finance markets have been going through turmoil, the pace of global expansion has slowed abruptly, and policymakers have focused on preventing a more pronounced slowdown. for some commentators, concerns over inflation appear to have taken a back seat, for now at least. as the global economy has weakened, commodity prices have fallen, substantially in some cases. many commentators are of the view that lower commodity prices and weak economic activity will drive inflation significantly lower. it is worth remembering that for the moment, however, inflation rates in new zealand ( and many of our trading partners ) 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 broadbased. these reflect some common drivers : • a strong run - up in world commodity prices, which have had a direct inflationary impact. oil prices increased nearly tenfold in usd terms in the decade to july 2008, with global food prices also rising strongly. prices of the milk, cheese and eggs category rose 18 percent over the last year. • the long - running expansion in domestic demand contributed to a build - up of pressures on capacity and high rates of domestically generated inflation. so far, weaker demand conditions have been slow to feed through into lower domestic inflation. in the building industry for example, rising prices for raw materials and strong wage inflation have continued to underpin high rates of construction cost inflation. • there have also been sizeable price increases in areas not directly exposed to a high degree of competition over the past few years. increases in local authority rates have run well in advance of overall cpi inflation for a number of years. cost increases in some utilities have also been notable, particularly electricity. • in the banking sector, the cost of international funding has risen significantly and become less assured. however, 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. banks should not expect to be able to maintain high profit margins in the current environment. table 1 consumer price inflation over the 3 years to 2008q3 cpi component average annual rate for the 3 years to september 2008 quarter annual percent

basel framework ; and · information on exposure concentration, exposures to connected parties, asset quality and profitability. the key information summary must be displayed prominently in, and be available on demand from, every bank branch. the general disclosure statement contains wider - ranging and much more detailed information on the bank and its banking group, including : · comprehensive financial statements ; · credit rating information ; · detailed information on capital adequacy, asset quality and various risk exposures ; and · information on the bank's exposure to market risk. one of the most important features of this disclosure framework is the role it accords bank directors. each director is required to sign and make certain attestations in the disclosure statements, including : · whether the bank is complying with the prudential requirements imposed on it by the reserve bank ; · whether the bank has systems in place to adequately monitor and control its banking risks and whether those systems are being properly applied ; · whether the bank's exposure to connected parties is contrary to the interests of the bank ; and · whether the disclosure statement contains all the required disclosures and is not false or misleading. directors face potentially severe criminal penalties and civil liability where a disclosure statement is held to be false or misleading. complementing the disclosure requirements, banks incorporated in new zealand are required to have a minimum of two independent directors ( who must also be independent of any parent company ) and a non - executive chairman. these requirements are intended to increase the board's capacity to scrutinise the performance of the management team. in addition, independent directors provide some assurance that the bank's dealings with its parent or other related parties are not in conflict with the interests of the bank in new zealand. the disclosure requirements have increased the accountability of bank directors and, indirectly, the accountability of various levels of management within the banks. as a result of the disclosure arrangements, we have seen directors taking greater care than might otherwise have been the case to ensure that they are adequately discharging their obligations. in so doing, directors have strong incentives to ensure that there are appropriate accountability mechanisms within the management hierarchy.