KEY POINTS:
Finance Minister Michael Cullen wants Treasury and the Reserve Bank to keep looking for alternatives to interest rates as a way to cool the housing market, but says he is satisfied with the way Governor Alan Bollard has set monetary policy.
Commenting on the eve of an expected rate rise, Cullen also said he was happy with the present monetary policy framework - the Policy Targets Agreement.
But the Finance Minister said more work was needed on finding alternatives to monetary policy itself, which was failing to cool housing market inflation and was instead clobbering the export sector by pushing the dollar higher.
"I think it's important that the Treasury and the Reserve Bank continue to think about these issues and that we have a calm and dispassionate view around what can and cannot be done," Cullen told the Business Herald.
"We have to continue to quietly work through how this is operating, what things we can do which are politically sustainable which don't do immense damage to some sector or other of the economy or society and which could work."
Treasury and the Reserve Bank have already tried to find alternative instruments to monetary policy, but came back empty-handed in April last year, finding drawbacks to all of the options they examined.
They were not allowed to examine a capital gains tax on property, but Cullen yesterday effectively ruled that out. "A capital gains tax on housing ignores the fact that in countries where you've got capital gains on housing you still have highly inflationary housing booms on occasion."
Cullen refused to be drawn on what specifically he thought could be done, but indicated there was no readily available answer.
"There's no great hidden secret in the cupboard or something to pull out," he said.
His comments came as Bollard was widely expected to lift the official cash rate by 25 basis points to 7.5 per cent this morning, among the highest interest rates in the developed world.
The rate rise will be the 10th in the current cycle, which began in January 2004 but has so far failed to achieve a sustained slowdown of the housing market.
The high proportion of borrowers who have fixed-rate mortgages has meant that many are immune to interest rate rises, at least until their fixed-rate terms expire.
At the same time, the high interest rates have helped push the kiwi dollar above US70c - compared with the long-run average of around US58c - causing pain for exporters and farmers. It closed at US68.25 yesterday.
Bollard's five-year term as bank Governor is due for renewal in September, but Cullen indicated yesterday he was unlikely to push for a change of Governor.
Instead, he expressed confidence in the way Bollard had set monetary policy. "I'm happy with the way Alan has operated it," he said.
When Bollard's term comes up for renewal, his inflation-fighting agreement with the Government is also automatically due for renegotiation.
Under the agreement - the Policy Targets Agreement - Bollard is required to keep inflation between 1 and 3 per cent "on average over the medium term" while avoiding unnecessary instability in output (economic growth), exchange rates and interest rates.
Cullen said he did not believe that changing that agreement would help with the current problem of the declining effectiveness of monetary policy.
"I'm happy with the [agreement] - the mid-term focus, 1 to 3 [per cent inflation target], also trying to take account of other macroeconomic variables and trying as best as possible to have reasonable stability in those as well," he said.
"Some people say maybe if you loosen the [targets] a bit more this problem won't arise. I don't think that's true. At any point you can set the [targets] at, you're sooner or later going to run into this issue."
He said he was concerned that ineffective monetary policy could damage the economy.
