Heresy is, unfortunately, becoming common in central banking. The world's most important central banks are printing money like there's no tomorrow.

Interest rates have been near 0 per cent for almost four years and look like staying that way for another four years.

Central bankers are thinking about how their policies are being offset or are working with governments to fund their spending. The days of central banks being able to run policy independently are ending.

Yet here in New Zealand, the belief that the Reserve Bank should be utterly independent appears non-negotiable. Even Labour, the Greens and New Zealand First do not suggest the bank should be stripped of its independence. They want to set different monetary policy targets for an independent RBNZ governor to pursue, but want to keep their hands off the day-to-day running of the bank.


Many would say that is a good thing. A whole generation of bureaucrats will point me back to the days when Prime Minister and Finance Minister Robert Muldoon ruled fiscal policy with an iron fist.

It's true - an independent central bank using one tool, the official cash rate, on one target, inflation, seemed to keep things simple when there was room to move interest rates.

But what happens when interest rates hit the "zero bound" and central banks have to start using unconventional measures such as government bond-buying, often referred to as quantitative easing?

The banks then become more directly involved in fiscal policy, either by financing it or by repressing interest rates.

New Zealand is a wee way from the zero bound but not that far. This week the Reserve Bank of Australia cut its OCR, Business NZ called for new RBNZ governor Graeme Wheeler to cut ours from its record-low 2.5 per cent, and markets priced in a 0.25 per cent cut over the next 12 months.

It's worth thinking about how our central bank would operate if it had to muddy its waters with fiscal policy. A commission to co-ordinate RBNZ and government activity was suggested last year.

It's time to think the unthinkable - just like all the other unthinkables we've had to think about since the global financial crisis shattered the myth that orthodox economic policy made the economy more sustainable.