Key Points:

Michael Cullen has committed heresy in the Temple of Monetary Policy.

For that he will be surely crucified by the high priests of ideological purity who believe nothing should come between the Reserve Bank and its never-ending crusade against inflation.

But the Minister of Finance may yet end up being punished more severely by those not so attached to the notion of central bank independence for failing (so far) to follow through on his threat to use emergency powers under the Reserve Bank Act to force down the dollar.

Cullen gambled on the mere threat of a switch in monetary policy doing the trick. But his warning has had zero impact on the dollar's value.

That has left Cullen stuck between the proverbial rock and a hard place.

If he does not suspend the Reserve Bank's primary focus on controlling inflation, he will be accused of making empty threats and his credibility will take another knock among those suffering from the high dollar and interest rates. And more so should the bank's governor, Alan Bollard, again hike the official cash rate next week.

Alternatively, if Cullen does follow through, he risks his credibility being completely ravaged if it creates more problems than it solves - as many economists fear would happen.

In threatening to override the bank's priority of price stability and require it to avoid damaging the exchange rate, Cullen has shaken monetary policy to the core.

He may have only issued a reminder of his powers in the Reserve Bank Act. But such talk has not been heard from a finance minister since monetary policy was taken out of politicians' hands in the late 1980s.

Not even Winston Peters went this far during his stint as Treasurer.

Cullen's radical, unexpected and uncharacteristic departure from the status quo has largely failed to impress financial analysts, economists and fellow politicians, although some will welcome him opening a debate on whether anti-inflation policy should be cast in stone.

That criticism might have been worth sustaining had the gamble paid off and the dollar fallen. But "Mrs Watanabe" - Cullen's mythical Japanese housewife investing heavily in high interest New Zealand bonds - was not listening to his warning. The markets ignored him because they do not think he is serious.

Among the voting public, yet another failed gambit to shift the dollar will be added to the ledger determining which of the two major parties is best at managing the economy. That is essentially what is at stake here politically. And the stakes are huge.

Knowing full well how economic mismanagement had been the death of previous Labour administrations, Cullen and Helen Clark vowed it would not be the death of them.

Over Labour's first two terms, Cullen successfully cultivated the image of a conservative finance minister. But over the last year, the slow strangling of exporters by an ever appreciating dollar has been accompanied by steadily increasing financial pain in the mortgage belt.

Cullen has looked powerless to stop it. For Labour, however, the arithmetic is deadly in electoral terms.

Some of the pain has been alleviated by Working for Families' income top-ups. But almost 30 per cent of the existing mortgage debt on fixed rates - representing close to a quarter of all mortgage debt - will roll over on to higher rates over the next 12 months.

Those mortgages will move from an average rate of 7.8 per cent to at least 9.25 per cent for a two-year fixed term. Households with a $150,000 mortgage over 20 years will be paying another $140 a month.

Many households are obviously going to be hit a lot harder - and without even the sniff of a tax cut on the immediate horizon.

Given residential mortgage loans total around 1.2 million, these figures may be the hidden reason why Labour has crashed in the polls.

The political pressure on Cullen explains what otherwise looks like a sudden rush of blood to the head.

After all, it is barely two months since he and Bollard signed an unchanged policy targets agreement maintaining the focus on price stability.

Since then, the pressure has intensified to find something to break the cycle of exchange rate and interest rate rises, while various solutions - a mortgage levy, capital gains tax and ring fencing tax losses on rental property, for example - have either been impractical, too hard to swallow politically or taking too long to make an impact.

The big difference this week is that Cullen has cut to the chase on monetary policy. Previously, he was was skirting it.

He may also have deliberately employed the old trick of flagging something, then holding back doing it until people have got used to the idea.

It is also worth remembering Cullen has tweaked monetary policy before, having inserted clauses in the policy targets agreement requiring the Reserve Bank to "avoid unnecessary instability" in the exchange rate.

All that - and Labour's increasing desperation - suggest the wielding of emergency powers cannot be ruled out.

Cullen may be waiting for the report on the review of monetary policy being conducted by Parliament's finance and expenditure committee.

It may offer some fresh solutions, but it might also provide political cover to invoke the emergency powers.

However, there are some pretty compelling reasons not to do so.

Suspending the priority on tackling inflation for 12 months may be fine in a recession. In an overheating economy, it is a recipe for disaster.

Uncertainty about the direction of economic policy might see lenders add a premium to interest rates, while the tight labour market would likely provoke a wage-price spiral upwards. Labour's record as a credible economic manager would correspondingly spiral downwards.

Moreover, any intervention will be seen as being about saving Labour as much as saving exporters.

It is conceivable Cullen is trying to ignite a debate on monetary policy in the belief that the majority will end up backing the status quo. Such a reaffirmation of the current thrust might take some of the heat off Labour.

He took that line when explaining why he did not block Winston Peters' bill which would have forced the Reserve Bank to have cognisance of the exchange rate, saying it made sense to send the bill to the select committee conducting the review of monetary policy so the issue could be further debated.

However, Cullen has another reason to hold off intervening to help the dollar. Bollard's hiking of interest rates should bite at some point, cooling the economy and prompting a slow reduction in interest rates and, with them, the dollar.

The two big questions are when, and, can he afford to wait that long?