By VERNON SMALL deputy political editor
Finance Minister Michael Cullen has fired a warning shot at the Reserve Bank, saying its interpretation of monetary policy is wrong.
If re-elected, the Government would rewrite its agreement with the bank unless it could be sure the next Governor accepted the Government's view.
"We can't have the Government and the bank having a different interpretation of the contract they have between them," said Dr Cullen.
The Government expected the bank to use the full width of the 0 to 3 per cent target band for inflation, rather than always aiming to move back to the 1.5 per cent midpoint.
"Of itself there cannot be a need to tighten if the forecast is for inflation to be within the target band," he said.
The bank is due to set the official interest rate next week, with most economists picking a rise of 0.25 basis points to 5.75 per cent.
"I don't think that anybody doubts that monetary policy is going to be tightened in 2002," Dr Cullen said.
"It is a question of how far and how fast against the policy target."
He would not criticise specific decisions of the bank or former Governor Don Brash, who is standing for National.
"My understanding is he is now a politician out kissing babies. The only problem is he still keeps checking to make sure they're not growing too fast."
Dr Cullen said he would not widen the inflation target range as part of any renegotiation.
Labour changed the targets agreement in 1999, requiring the bank to implement monetary policy "in a sustainable, consistent and transparent manner and ... seek to avoid unnecessary instability in output, interest rates and the exchange rate".
Dr Cullen said Acting Governor Rod Carr's reply to parliamentary questions showed the bank's interpretation did not reflect that wording.
Dr Carr had said the risk of creating unnecessary instability, and so causing damage to the economy by letting inflation expectations drift to the edges of the band, "is the reason why we aim to nudge inflation back towards the middle of the target range".
National leader Bill English said Dr Cullen was creating confusion.
"If Michael Cullen wants higher inflation then he should say so.
"It seems obvious that the best way for the Reserve Bank to avoid any inflation breaches is to aim for the middle of the target band."
Dr Cullen's comments came at press conference called to release the pre-election opening of the books.
The economic and fiscal update, designed to give political parties up-to-the-minute data for the campaign, showed little change from last month's Budget numbers.
A stronger dollar trimmed growth expectations and forecast Budget surpluses. Growth is expected to average about 3 per cent over the next four years and unemployment hover just above 5 per cent.
Wages are expected to outpace inflation without triggering an inflationary spiral.
Dr Cullen said there was some concern about the rising dollar, but it was mainly the result of a weaker US currency.
National's finance spokesman, David Carter, said the figures showed the economy had peaked, which was why Helen Clark had called an early election.
"On the back of our strengthening dollar, export growth is down, leading to lower GDP growth and a worsening balance of payments."
Full text:
Pre-election Economic and Fiscal Update 2002
Full news coverage:
Election links:
The parties, policies, voting information, and more
Ask a politician:
, on any topic, addressed to any party leader. We'll choose the best questions to put to the leaders, and publish the answers in our election coverage.