KEY POINTS:
The Government has raised the prospect of stepping in to prevent another interest rate rise and stem the dollar's surge.
Finance Minister Michael Cullen yesterday went out of his way to repeatedly highlight a little-known section of the Reserve Bank Act allowing the Government to change the way interest rate decisions are made.
If triggered, section 12 of the act would allow the Government to order the Reserve Bank to base its interest rate decisions on other factors such as the level of the dollar rather than just on inflationary pressures.
Such a move would be a jolt for financial markets and investors.
Dr Cullen's willingness to consider such a prospect is drawing heavy criticism from political rivals but there is major concern within the Beehive about the record high levels of the dollar.
It remained above US79c this morning and is putting immense pressure on exporters.
The currency is being supported by high interest rates and the Reserve Bank is expected to raise rates even further next week - potentially fuelling another spurt in the currency.
Dr Cullen said yesterday that while he had not given any "specific consideration" to entering the fray and invoking section 12, he would never rule out its potential use.
"Section 12 is clearly there for a good reason," Dr Cullen said.
"I would certainly not rule out its use."
Discussion of the mechanism was triggered by Dr Cullen on Tuesday, when he mentioned it - unprovoked - during Parliament's question time.
The comment came as New Zealand First leader Winston Peters sought support for a bill to amend the Reserve Bank Act to force it to take into account factors other than inflation when making interest rate decisions. Dr Cullen did not oppose Mr Peters' bid to introduce the bill, but National did.
Yesterday, Dr Cullen said he was "not afraid" to send Mr Peters' bill to a select committee for an "intelligent discussion".
He then worked in tandem with Associate Finance Minister Trevor Mallard to again draw specific attention to section 12 of the Reserve Bank Act.
It is not known if Dr Cullen would realistically consider taking the drastic action he has highlighted.
It appears most likely that he is simply trying to talk the currency down, by unnerving investors enough so that they sell.
But Dr Cullen's comments also carry a degree of risk - that overseas investors will see the country's monetary policy framework as less stable than thought - and steer clear of New Zealand in future.
National Party deputy leader Bill English climbed into the fray, saying Dr Cullen was inviting a "shambles".
"For 20 years, the Reserve Bank Act has been a cornerstone of the economic management of New Zealand," Mr English said.
"A cornerstone of the credibility of this country which means we can borrow hundreds of millions (of dollars) overseas at reasonable interest rates."
Mr English expected the idea of changing the Reserve Bank Act to "go down the drain" in much the same way Dr Cullen's open talk of a tax on mortgage rates and changes to landlord tax arrangements apparently had.
National leader John Key said that if the Government did step in, it would be a "significant and radical departure from monetary policy as we knowit".
He believed Dr Cullen was trying to talk the currency down.
