Rethink on interest-rate policy

01:43, Jan 31 2009

The Government is signalling a change in the way the Reserve Bank fights inflation in what could mark the first major shift away from the bank's focus on interest rates as its sole weapon.

It is understood the Government has decided to give up on seeking consensus with National over possible changes and will go it alone.

That could see it campaigning on changes to the policy targets agreement between the finance minister and the governor of the bank - or even changes as radical as amendments to the Reserve Bank Act itself.

"The Government is open to looking at alternatives that best serve the modern economy," Associate Finance Minister Trevor Mallard said.

It is understood ministers are concerned that a focus on housing during the boom years attacked a single sector but had economy-wide effects. They are also worried that high interest rates led to a "one-way bet" on the dollar that kept the currency high, harming exports.

Mr Mallard said the focus on inflation was appropriate when the bank was first independent.

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"For a number of years ... inflation has been driven by increased domestic demand that stems from a buoyant housing market, fuelled by cheap foreign capital attracted by a stable economy and relatively high interest rates.

"Now we have inflation challenges driven by record high international prices of food and oil. In both cases the tools available to the Reserve Bank have not been able to address those problems.

"In fact, in the first case it could be argued that they exacerbated the problem."

Finance Minister Michael Cullen was not in the House yesterday, but it is unlikely Mr Mallard would make such far-reaching comments without running them past him.

Campaigning on a change would probably make it easier for Labour to strike a deal with NZ First.

Labour might also see advantage in leaving National to defend the status quo. National finance spokesman Bill English told business leaders last month that his party saw no reason to change the monetary policy framework.

The Dominion Post