Further cuts in the bank's official cash rate depended on all sectors in the economy responding to that call.
"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," he said in a speech to a Wellington business audience.
Since July, the Reserve Bank has cut the OCR by 3.25%.
It is now 5%, with economists predicting it could fall to 3.5% by the middle of next year.
Dr Bollard said that with a global economic slowdown, concerns over inflation appeared to have taken a back seat for some commentators.
Many of those commentators were of the view that lower commodity prices and weak economic activity would drive inflation significantly lower.
"It is worth remembering that for the moment, inflation rates in New Zealand remain very high. In the September 2008 year, CPI inflation reached 5.1% - the highest rate since 1990. The higher rates of inflation are broad based."
Common drivers had been: strong world commodity prices; domestic capacity pressures because of demand; and sizeable price increases in areas not directly exposed to a high degree of competition such as local authority rates and electricity prices.
With substantially lower commodity prices, there was room for further price cuts, he said.
Retail margins could be expected to reflect lower costs and the tight environment.
Retail banks should not be looking to maintain high profit margins in the current environment.
"We would hope that the electricity industry does not take advantage of its market position and keep increasing rates [and] that local authorities realise they need to set rates increases below inflation for a change."
Those words will be welcomed by Local Government Minister Rodney Hide, who this week released the formal briefing prepared for him by Local Government New Zealand.
"As Local Government Minister I have primary responsibility for local government and for its overall effectiveness - the minister is not responsible for specific decisions or actions of local councils," Mr Hide said.
"As well as the formal legal role, I will have a leadership role - and that's the key role as I see it. I want the 85 local authorities to account for their spending and effectiveness in a way which gets the full confidence of their citizens."
The briefing showed that the decade from 1998-2007 experienced a constant trend of rates and expenses rising faster than general inflation.
After adjusting for inflation, rates rose by 41.6%.
Mr Hide said he wanted a New Zealand where ordinary ratepayers could say "my council does a good job, and spends my money wisely".
That was the goal he would urge councils to work towards, and he urged all ratepayers to take a keen interest in the progress they were making, he said.
Dr Bollard also wanted the construction materials industry to respond to much weaker demand; the food industry to react to lower international commodity prices with price cuts; petrol companies to keep cutting forecourt prices; the transport industry to pass on fuel price cuts; and banks to pass on interest rate cuts.
"Only then will all these firms be playing their proper role in New Zealand's recovery."
