KEY POINTS:
What strange and potentially dicey game is Michael Cullen playing?
Is the Minister of Finance seriously thinking the unthinkable and contemplating using his powers of last resort under the Reserve Bank Act to override the bank's primary task of curbing inflation and force it to take heed of the damage to exporters before further raising interest rates?
Or is his refusal to rule out such intervention simply designed to spook overseas investors and provoke a stampede out of the dollar?
Or is it simply a case of Labour humouring NZ First, its confidence and supply partner?
Dr Cullen has appeared to give substance to the latter interpretation by choosing not to block the introduction of Winston Peters' bill amending the Reserve Bank Act so that the exchange rate would be maintained at levels which "promote the overall prosperity and wellbeing of New Zealanders".
However, keeping Labour's support partner happy looks to be only a subsidiary motive for Dr Cullen suddenly feeling the need to remind everyone that he already has powers to rewrite the Reserve Bank's economic objectives.
Such deliberate highlighting of those powers suggests Dr Cullen's motives go deeper than merely paying lip-service to Winston Peters' calls for a radical overhaul of the objectives of monetary policy.
The prevailing view in Government circles is that Dr Cullen is trying to inject uncertainty into the financial markets. He is endeavouring to jawbone the dollar down by sending a message that speculating on the currency should not be regarded as a safe one-way bet.
Dr Cullen may have no intention of intervening and is instead hoping that leaving the possibility hanging in the air will do the trick. But the markets may well see through that and regard talk of intervention as an empty threat.
Dr Cullen's other motive for talking up his powers springs from the political pressure on Labour to be seen to be doing something about the overvalued dollar.
Other interpretations have him sending a blunt warning to the bank's Governor, Allan Bollard, not to raise rates again when he reviews the official cash rate next week.
Then there is a theory that Dr Bollard and Dr Cullen are in cahoots, such is their desperation to find some way of stemming the dollar's surge.
Regardless, Dr Cullen is verging on dangerous territory. His mention of intervention risks being seen as jeopardising the Reserve Bank's independence and damaging the country's international reputation.
He risks being accused of making the governor's job even more impossible. If politicians start putting even the tiniest doubts in people's minds about their commitment to such an economic fundamental as low inflation, where does that leave Dr Bollard?
That is the bottom line. Despite fluctuations in the exchange rate, the political consensus that the fight against inflation be the absolute priority has held since the 1980s to everyone's benefit.
Dr Cullen's talk may yet weaken the dollar. The far bigger threat is that it seriously weakens that political consensus.
Such talk is a quantum leap from the consensus on monetary policy that has held pretty much rock solid for two decades, and finance ministers do not stray into such territory without very seriously thinking through the consequences.
Dr Cullen has been quick to state he has given "no particular consideration" to issuing a directive to require the bank to run monetary policy to meet objectives other than just price stability.
But why did he mention his powers if he has no intention of using them?
The plot thickened in Parliament yesterday when Associate Finance Minister Trevor Mallard made a point of asking Dr Cullen to repeat that he would never rule out the possibility of intervention.
