KEY POINTS:
What's wrong with Alan Bollard? Can't he see economic growth is grinding to a halt, factories are closing and the housing market is crumpling under the weight of ever higher mortgage rates?
Yet he stands there with his arms folded and an official cash rate stuck at an
eye-watering 8.25 per cent.
And now we are told he's the reason we will have to wait until next year for some tax relief.
The frustration is understandable but it invites another question in response: Inflation not high enough for you then? You want more?
The man is just doing his job.
His job is to deliver sound money - to ensure that when a $20 note wears out it is still worth something close to what it was worth when it came new from the mint.
We learned the hard way in the 1970s and 1980s how important that is.
Right now we face the aftermath of an extended borrow-and-spend binge.
Consumption grew faster than incomes and faster than the economy's productive capacity, propelled by the wealth effect from an exceptionally strong housing boom.
The result has been a toxic build-up of inflation, a blowout in the country's external accounts and 71 per cent increase in mortgage debt over the past four years.
Annual inflation rates have averaged 2.975 per cent over the past three years, barely within the Reserve Bank's 1 to 3 per cent target band.
In part this record reflects Bollard giving us the benefit of the doubt, putting rates on hold and living to regret it. The housing market got a second wind as banks tapped cheap sources of overseas funding (which aren't so cheap any more).
The bank itself forecasts another year of inflation above 3 per cent.
Little wonder, then, if hard-won confidence that we operate in a low-inflation environment is under threat.
The NZIER's latest quarterly survey of business opinion recorded a steep rise in the proportion of firms which have increased their own prices in the past three months or which intend to increase them. Both inflation gauges are at the highest level since March 1987.
And Statistics New Zealand reports that non-tradeables inflation - the kind that can't be blamed on international prices or the exchange rate - showed no sign of abating in March, up 1.1 per cent for the quarter and 3.5 per cent for the year.
That is the view in the rear view mirror, however.
Monetary policy has to be forward-looking. Surely a slowdown as severe as the current one will deal to inflation?
The ANZ National Bank's economists have looked at the past two recessions, in the early 1990s and the Asian crisis. In both cases non-tradeable inflation did indeed abate quickly, lagging activity by about a year.
But they point to factors that might make this cycle different and inflation more persistent, especially in sectors immune from competitive pressure. Among them are the impact of fuel surcharges, the emissions trading scheme and relentlessly rising local body rates.
It means the disinflationary forces in sectors where competitive disciplines are at work will have that much more work to do.
ANZ's chief economist Cameron Bagrie warns that unlike previous downturns this time the main adjustment will fall on households. It is they, more than companies, which need to pull in their horns and reduce debt.
That will make it a more arduous and drawn-out affair, he says, as the starting position is a negative households savings rate and weak balance sheet.
Westpac, on the other hand, expects that after a feeble 2008 (they see the economy growing just 0.5 per cent this year) it will rebound strongly next year, with annual growth of 4.4 per cent. "Our exceptional terms of trade, strong wage growth and sound fiscal position mean we are well-positioned for growth once credit conditions normalise, the short-term impacts of drought receded and the worst of the housing correction is over."
But the cloud accompanying that silver lining is that a short sharp slowdown might not break the back of non-tradeable inflation, keeping interest rates and the dollar high for longer.
The link between the exchange rate and international interest rate differentials has led to calls to rethink the monetary policy framework.
Either abandon curbing inflation as the primary objective of monetary policy, its critics say, or at least come up with alternative instruments to the official cash rate that might inflict less collateral damage on exporters and firms competing with imports.
It is not just local voices taking this line. A couple of eminent visiting economists have too - Nobel laureate Joseph Stiglitz and Robert Wade of the London School of Economics.
"It's exactly the wrong mandate, especially at the current juncture," Stiglitz said. "In a small open economy quite often raising interest rates is counter-productive because it induces a flood of capital into the country and doesn't have the dampening effect it would have in a closed economy."
It was also ineffectual if the inflation was imported, he said, such as when it reflected high international prices for food and oil.
Wade pointed to how the carry trade - speculative capital inflows exploiting interest rate differentials - stymies what is supposed to be one of the benefits of a floating exchange rate: correcting external imbalances.
In theory a country running the sort of trade and current account deficits New Zealand has should see its currency depreciate.
In fact, Wade said, of the 17 countries with the largest current account deficits between 1996 and 2006, 14 saw their real effective exchange rates rise, while five of the seven countries with the largest surpluses had their currencies fall.
"Where some governments are inflation-phobic and others are trying to stimulate, and where capital flows are unrestricted, interest rates in the inflation-prone countries are likely to rise to levels which attract carry trade inflows from low inflation countries to capture the interest rate differentials."
Monetary policy, he concluded, should not be just about inflation but should be orientated more towards the exchange rate and asset markets.
The Reserve Bank doesn't really need the good professor to remind it of the perils of house price inflation, or of the importance of the exchange rate in an economy as small and open as ours.
But the brutal reality is that while households were able and willing to borrow cheaply offshore (through their banks) to finance a housing boom, in blithe disregard of how high the official cash rate was, the only way monetary policy had any real traction was via the exchange rate.
Whether there is a better way of doing this is an issue the finance and select committee has been grappling with. It is expected to report late next month or in June.
Don't hold your breath.
