KEY POINTS:
Desperate politicians say desperate things. In Parliament last Wednesday, an Associate Finance Minister, Trevor Mallard, said the Reserve Bank Act, 20 years old next year, had not worked as well in its second decade as it had in its first, and that the Government was open to alterations.
This is the sort of talk that can shake the foundations of economic stability. The act has been the means by which inflation was brought under control and kept under control with largely bipartisan support. Why would a senior Labour minister disturb it now?
Possibly Mr Mallard is expressing a maverick view, but that seems unlikely. If Michael Cullen should decide to retire at this year's election, Mr Mallard is his probable replacement. Conceivably he could be Finance Minister when Labour bids for a fourth term.
With the polls running heavily against that prospect, Labour's re-election hopes rest on small parties that might hold the balance of power.
Winston Peters' party might be the most pivotal of them. He has railed against the Reserve Bank Act from its inception and still believes it is doing more harm than good. Mr Peters has promised that after the election he will "talk first" to the party that has won the most votes, but that is as far as he goes.
Mr Mallard believes the Reserve Bank Act has not worked as well in its second decade because counter-inflationary interest and exchange rates attracted investment in housing that fed a consumption boom and reduced export returns. Now, he says, inflation is being driven by imported fuel and food prices that monetary instruments cannot counter.
He has no particular amendments to the Reserve Bank Act to suggest. When pressed, he said: "I'm not proposing any change at all and I want to make it absolutely clear no decisions or current proposals are before the Government." There was no cross-party consensus for change, he said, and added: "The question is whether there is enough minor party support for something we would want to do."
So it seems to be just a speculative pitch to Mr Peters. There are of course weaknesses in current anti-inflation policies, but they do not lie in the Reserve Bank Act or in the bank's conduct of monetary policy. They lie in taxation arrangements that make property by far the most attractive investment in this country.
The foreign capital attracted here by counter-inflationary interest rates might not have fed a consumption boom if it had gone into more productive sectors. And without that over-fed, inflationary consumption, interest rates would not have needed to be as high.
Property taxation is the key, but no party is likely to say so before the election.
The more immediate monetary problem that Mr Mallard cites - fuel and food prices - are contingencies the Reserve Bank Act has in fact anticipated. The bank is not required to counter a surge in the price of an imported commodity, particularly oil. It must, however, counter consequent inflation. If firms raise their prices to recover higher fuel costs, or wages and salaries rise proportionately, the bank must put, or keep, interest rates up.
The Government has clearly hoped interest rates can be lowered before the election. It believed the May Budget, despite its projected tax cuts, gave Reserve Bank Governor Alan Bollard the room to reduce rates.
The independence he has under the act enables him to make a decision unclouded by political considerations. And the act's clarity of purpose makes his decisions effective.
The act has been a pillar of stability and prosperity for nearly 20 years. No wannabe finance minister should trifle with it.
