For months, politicians and economists have looked at Reserve Bank Governor Graeme Wheeler as if he was a potential arsonist in the Auckland housing market, with the ability to pour petrol on the fire with rate cuts.

Prime Minister John Key and Finance Minister Bill English have openly mused about how the Reserve Bank would have to be careful about cutting the Official Cash Rate because it would pump up already over-valued housing prices.

The question bubbled up this year as inflation plunged towards zero and the governor faced calls to push inflation back towards the 2 per cent mid-point of his 1-3 per cent target band.

But exporters, unionists and business leaders alike have worried Auckland's housing market could prevent a much-needed rate cut.

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It's clear after this week's Monetary Policy Statement that Wheeler does not think he can risk cutting the OCR.

He said the financial stability of the Auckland market was a concern, but not a factor in his decision to keep the rate on hold and remove any prospect in the bank's forecast for hikes before 2017.

Wheeler said the Auckland housing boom this year was different to that seen more widely throughout New Zealand in 2006 and 2007, when homeowners flush with the joys of the fresh equity in their housing ATMs went on a spending spree.

Back then, mortgage lending was growing at more than 15 per cent a year to finance new baches, boats, holidays and decks. That drove up consumer prices generally and helped push domestic inflation to more than 4 per cent.

Wheeler has not seen that sort of reaction this time around, with bank mortgage lending still growing at less than 5 per cent per year.

It's clear after this week's Monetary Policy Statement that Wheeler does not think he can risk cutting the OCR. Photo / NZME.
It's clear after this week's Monetary Policy Statement that Wheeler does not think he can risk cutting the OCR. Photo / NZME.

"You're seeing quite a lot of consumption growth in the economy, but a lot of that is because of employment growth and strong income growth," he told a news conference on Thursday.

"We're concerned about the Auckland housing market for financial stability reasons, but it didn't affect the way we thought about monetary policy."

That means Wheeler will not hold back from cutting the OCR if he thinks in the coming months that the inflation outlook over the next couple of years has softened markedly.

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He opened up that possibility by pointing to a Reserve Bank scenario where inflation expectations halved to near 1 per cent over the coming year. That would allow the Reserve Bank to cut the OCR by 50 basis points.

The irony is that such a cut would no doubt pump Auckland house prices even higher.

Wheeler is still considering forcing banks to hold more capital to back mortgages to landlords, as well as other tools, but for now he doesn't think his stand on OCR cuts will spark the sort of inflationary fire he has to worry about.

He has other firefighting tools he may use.