KEY POINTS:
Finance Minister Michael Cullen is right to raise the issue of whether something like a mortgage rate levy is needed, says Bank of New Zealand chief economist Tony Alexander, even if there is little chance it will be adopted.
In contrast to some of his peers - who say the monetary policy lever is not broken and if it were this would not fix it - Alexander sees the official cash rate as ineffectual, apart from the collateral damage it inflicts on the export sector by its effect on the exchange rate.
Can the economy grow long-term, he asks, if the task of keeping inflation in bounds is perpetually impeding export growth?
It is not just the size of the interest rate cycle - 225 basis points so far compared with 150 in Australia - but how long rates spend at their peak.
So Alexander advocates a variable levy on fixed mortgage rates which would, in effect, turn them into floating rate loans and speed up the response to official cash rate changes.
"The Reserve Bank is stuck in an old paradigm. Dr Cullen can see that and is frustrated that the bank can't see the ground has shifted beneath their feet."
But Westpac chief economist Brendan O'Donovan says even if the political problems of introducing what would be seen as a retrospective tax on mortgages could be surmounted, it would be easy to get around it.
Banks could lessen its effectiveness by extending the term of a fixed-rate mortgage or shifting a customer to interest-only terms while the levy was in place.
"It's in the interest of banks to ensure their customers can service their debts."
New Zealand dollar mortgages could be issued from Australia, Fiji or the Cayman Islands, making enforcement a nightmare.
The small businesses that rely on loans secured by residential loans would be hit.
O'Donovan does not accept that the monetary policy framework is broken.
"The problem is that monetary policy takes longer to have its impact. The solution is either more patience or more aggression in the application of monetary policy."
Some of the Reserve Bank's recent difficulty arises from its own policy mistake in 2003, he says.
Fearing global deflation and the potential impact of Sars, it cut interest rates when, with the benefit of hindsight, it did not need to and in so doing it fuelled the property boom.
For much of the tightening phase, which began three years ago, the bank has been bucking easy monetary policy elsewhere in the world, which has a major influence on the cost of the funds used for fixed rate loans. But the globalisation of capital markets does not just affect New Zealand.
"We don't hear other countries complaining that monetary policy is ineffective."
Economist Ulf Schoefisch says there has been a "step change" in people's willingness to take on debt.
It might reflect confidence in low inflation and systematically lower interest rates, coupled perhaps with demographic changes affecting the labour market and job security.
During such a transition monetary policy is bound to struggle to gain traction.
"But we will reach a level when things return to normal. The best course is just to ride it out," he said.
"And the simple fact that no one else around the world has done this [introduce a mortgage rate levy] suggests we want to be careful."
Employers and Manufacturers Association chief executive Alasdair Thompson says a tax on interest rates to check house price inflation would be highly unorthodox and likely to distort investment in business.
