Cullen accused of Muldoonism

By AUDREY YOUNG

Michael Cullen has been accused of interfering in the Reserve Bank in a similar way to Sir Robert Muldoon and of being in danger of increasing interest rates as a result, not lowering them.

National candidate and de facto finance spokesman, Don Brash, made the sweeping comparison while accusing Dr Cullen of trying to put political pressure on the bank not to raise interest rates next week.

It is the first public battle between him and Dr Cullen since Dr Brash resigned as Reserve Bank Governor for an assured place in Parliament at No 5 on the party list.

The bank is due to set the official interest rate next week as part of its objective to keep inflation between 0 and 3 per cent.

It has acknowledged that it aims to nudge inflation to the mid point rather than let it drift towards the outer edge of the band and risk breaching it.

But Dr Cullen believes it chokes economic growth. He wants the bank to be more flexible in its inflation targets and use the full range rather than aiming for 1.5 per cent.

He said on radio yesterday that Australia effectively operated from a 2.5 per cent mid point.

Dr Brash called a press conference in response.

He said the comments were "a clear attempt to try to influence the bank's decision next week".

"We haven't had that kind of political interference for a number of years, since Rob Muldoon was Minister of Finance," Dr Brash said.

"When the minister was telling the bank how to run monetary policy it was a disaster."

In the 1980s New Zealand had inflation of 10 to 15 per cent and mortgage rates of 21 per cent.

"The worst thing about the minister's comments is they imply a bit more inflation will buy more growth,"he said.

"We cannot get more growth by simply tinkering with the inflation rate."

Dr Cullen appeared to want higher inflation and that was very dangerous.

If he wanted a higher inflation rate, he should say so.

"If he starts interfering regularly with the bank's decision-making process we are going to see inflation expectations rise. That is going to push up interest rates, not push them down. That's going to have a detrimental effect on the economy."

Dr Cullen would not respond to Dr Brash's comments, but told the Association of Economists conference in Wellington that raising the growth rate to 4 per cent within the next five years was the first step in returning New Zealand's real per capita income to the top half of the OECD.

The Treasury is forecasting annual GDP growth to average 3 per cent over the next four years.

Earlier on Morning Report Dr Cullen cited research which said that, while low inflation was important to underpinning strong economic growth, "trying to squeeze the last tiny bit out actually became counter-productive and started to work against economic growth".

"So National, through what appears to be its finance spokesman, is saying they would appoint a growth-unfriendly Reserve Bank governor and be obsessed with squeezing that last 1 per cent out rather than ensuring the economy was growing."

List MP David Carter is National's finance spokesman but Dr Brash is expected to get the job after the election.

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