KEY POINTS:
The vexed issue of how to combat inflation without clobbering the export sector led to a rare moment of bipartisan consensus yesterday.
Finance Minister Michael Cullen and National's Don Brash and John Key all agreed that action needs to be taken.
Cullen, appearing before Parliament's finance and expenditure
select committee, said monetary policy worked on the assumption that, when changes were made, there was a reasonably short time before a response occurred.
But because New Zealanders had moved en masse to fixed-rate mortgages, and increasingly longer terms, there was now an issue about the ability of monetary policy to deliver.
The initial impact of a rise in the official cash rate tended to be heavily on the business sector, where interest rates were much more related to the overnight interest rate, and on the export sector because of the impact on the exchange rate.
"I think we do have to quietly think about that," he said.
"If there is to be any change or any movement in the matter, as far as possible it should be consensual, because the successes of New Zealand monetary policy over the last 20 years have been because because there has been a high degree of cross-party buy-in to the framework," he said.
National's finance spokesman Key, a member of the select committee, agreed.
"And there will be a substantial issue on the downside as well ..." he said.
"Because you can't speed it up again either," said Cullen, finishing Key's sentence for him. "That's exactly right."
The Leader of the Opposition and former Reserve Bank governor Don Brash said later he would be open to the idea of discussing with the Government whether there were supplementary measures that might be added to the bank's armoury to reduce its dependence on the single instrument of an official cash rate.
He sees the problem not so much as the prevalence of fixed-rate loans but the relationship - by no means a mechanical one - between monetary policy and the exchange rate.
But it wasn't a new problem, Brash said.
"It's exactly the problem we had in the mid-1990s and we all anguished over it.
"We shouldn't leap to the conclusion that there are any simple solutions. There aren't. If there were, lots of other people would be using them."
A search party of Reserve Bank and Treasury officials sent out to look for a "supplementary stabilisation instrument" earlier this year came back empty-handed.
A symposium of economists to discuss the issue in June also failed to find a silver bullet.
But one of the contributors, former Reserve Bank of Australia deputy governor Stephen Grenville, saw merit in a mortgage rate levy - an additional charge for borrowers set by the Reserve Bank.
It would at times widen the gap between the rates banks charge and the rates they pay.
On tax cuts, Cullen said it was not just a matter of whether the Government had the money, but what the impact would be on macro-economic management.
The worst-case scenario would be a credit rating downgrade, but more likely would be tighter monetary policy, with flow-on effects on the export sector.
But Key said representatives of ratings agency Moody's had told him they could not imagine circumstances in which New Zealand's AAA rating would be downgraded - "and certainly not on the basis of tax cuts given the current state of our balance sheet and surpluses".
Talk of the risk of downgrade was scaremongering.