Prime Minister John Key was put in a slightly uncomfortable position this week, and it wasn't just over Maurice Williamson's resignation.

Labour's monetary policy announcement put the Government into the awkward position of having to argue in favour of higher interest rates and a high New Zealand dollar.

Labour finance spokesman David Parker's idea of increasing the savings rate in a universal KiwiSaver scheme to take pressure off interest rates and the New Zealand dollar certainly backed Key and Finance Minister Bill English into a corner.

The Government's opposition only served to expose and reinforce the political calculations behind our currency and interest rates. It also meant the Government had to argue against an expansion of a popular savings scheme that it has supported, albeit reluctantly.


Key called Labour's Variable Savings Rate "wacky" and compared it to "pixie dust", but when asked about the prospects for lower interest rates and a lower New Zealand dollar, he explained his conflicted view.

"You've just got to be careful what you wish for because a substantial reduction in the exchange rate would certainly see a lot of consumer goods go up in price," Key was quoted as saying.

This contrasted with the Govern-ment and the Reserve Bank's drumbeat in recent months about how the currency was overvalued and unsustainable. English has been saying since last year he expected the currency to come down and has admitted the Government's long-term target of lifting exports from 30 per cent to 40 per cent of GDP by 2025 would be difficult with an overvalued currency.

That overvaluation has become even more acute since February because dairy commodity prices have fallen 20 per cent since then, but the currency has remained stubbornly over US.85c.

So does the Government want a lower currency to encourage exporters to create more jobs in a productive economy? Or does it want a stronger currency to increase consumers' buying power?

This is where the political rubber hits the economic road.

The Government can talk all it likes about the economic necessity of a more fairly valued currency that helps exporters in general and farmers in particular, but there are far more consumers and workers than there are farmers and exporters.

The short-term interests of the many will trump the short-term interests of the few every time.

The Government's reaction exposed this uncomfortable truth. New Zealanders love cheap imports and overseas holidays. That pressure becomes acute as the economy picks up and employment starts growing. As wages and costs for locally made goods and services rise, consumers and businesses look for cheaper alternatives overseas. Anything that threatens that is unwelcome.

English's brief comments about how term depositers would be losers if interest rates fell under Labour's plan also exposed the Government's discomfort. But it also exposed a somewhat surprising truth - some people love high interest rates.

There are now many more term depositers than there were the last time interest rates were rising in the months before a Government was trying to win a third term. In mid-2005, household term deposits totalled $57 billion. They were worth $127b in March this year.

Former Reserve Bank Governor Alan Bollard used to say, only partly in jest, that he received more letters of complaint when he cut interest rates than when he raised them.

It may be depressing but politicians and voters respond to incentives, and those short-term incentives are in favour of high interest rates and a high New Zealand dollar.