KEY POINTS:
Finance Minister Michael Cullen was accused today of playing a high stakes game of monetary policy poker with foreign currency speculators.
Dr Cullen told journalists and Parliament that he had been deliberately trying to raise awareness of his never-used power to suspend his agreement with the Reserve Bank to target inflation.
Monetary policy has always traditionally just attacked inflation, but under the minister's powers it would be possible, for instance, to tell the Reserve Bank that the dollar was so overvalued that it should cut interest rates.
That could hurt many international currency speculators who have been buying the dollar confident that interest rates will remain high or go even higher.
Such a move would be unprecedented in New Zealand since the Reserve Bank was given authority, as an independent body, to combat inflation.
Yesterday, Dr Cullen said he was just pointing out that the power existed and while not actively considering its use, would not rule it out.
Today, Dr Cullen was less coy.
"I am just trying to point out to people there are risks they might not be aware of," Dr Cullen told journalists.
He said they should understand that buying the New Zealand dollar was "not a one-way bet on the dollar rising".
In Parliament under questioning from National, Dr Cullen was initially more cautious saying he was just warning foreign investors that the dollar could go a long way down and he did have the power to suspend current monetary policy.
National's finance spokesman Bill English said since Dr Cullen had made the threat wouldn't it be wise to let the market know in what circumstances he would use his powers.
Dr Cullen said it wasn't his job to give certainty.
"It is those who are making money out of speculating on New Zealand's currency who want certainty. It is not the job of myself or the Governor to create that certainty for them," Dr Cullen said.
Asked if he was just playing a game to try and scare the markets, Dr Cullen said his power were real.
"No Government should tell the financial market speculators when it might use such a provision ... the mythical investor of Japanese housewives need to know what the Reserve Bank Act says."
Outside Parliament, Mr English said Dr Cullen was escalating his attacks on the market.
"In Parliament Dr Cullen eventually made it clear that he has raised this issue to make sure investors know that provision is in the act. That can only be read as an escalation of what he said yesterday, it amounts to a threat," Mr English said.
"It shows he is willing to override the whole monetary policy framework for political reasons. He wants to be seen attacking market speculators and supporting exporters."
Mr English said the minister was at risk of losing his credibility.
"He's been playing a game of poker in which he has been playing a few cards through the first half of this year. This time it is serious though because he is undermining the whole framework by cutting across the Reserve Bank."
Mr English said Dr Cullen was putting short term political interests ahead of the long term economic good of the country.
"It isn't worth it. New Zealand borrows billions of dollars every year from overseas and the reason people are willing to lend to us at reasonable interest rates is that monetary policy is not political."
Threatening to use a power intended for true economic crisis at the current time would bring about higher long-term interest rates because lenders would demand a higher risk premium.
In Parliament, National once again blocked a bill proposed by New Zealand First to give the Reserve Bank wider economic priorities than inflation.
- NZPA
