Brian Fallow: Hey Governor, all you're doing is firing blanks

Alan Bollard was entitled to a stiff drink when he got home last night.

First, he got a brutal reminder that the bullets he has been firing on the inflation-fighting front are little more effective than a fusillade of marshmallows.

He delivered as menacing a monetary policy statement as he could short of hiking rates, only for two banks to lower mortgage rates.

Former US President Teddy Roosevelt's dictum was to speak softly and carry a big stick. Bollard was talking tough yesterday, because his monetary policy stick looks kind of small and brittle.

Barely more than a third of the interest rate increases he has doled out since the start of last year have reached the mortgage belt yet. And as for the impact that is still "in the pipeline", global interest rates are so low the pipeline is clogging up fast, as the moves by Kiwibank and the National Bank illustrate.

Then he had to front to MPs on the finance and expenditure committee who were, understandably, keen to draw him out on the potential inflation and interest-rate consequences of tax cuts.

He was resolutely non-committal.

The impact would depend.

It would depend on the extent of any tax cuts and who got them (the rich being more likely to save some of theirs).

It would depend on how they were financed, to what extent they were funded by cuts in Government spending, and what sort of spending was cut, and to what extent they were financed by borrowing.

And it would depend on the timing.

In the end, the MPs were left with a tautology: anything which adds to demand in the economy adds to demand.

But it was perhaps a foretaste of an Australian-style electoral campaign in which the threat of higher mortgage rates becomes a partisan weapon and an independent central bank can only grit its teeth.

Finally, Finance Minister Michael Cullen indicated the Reserve Bank could be stripped of its role supervising the banking sector, not to Apra in Australia - never the plan, Cullen insists - but to something like it on this side of the Tasman.

A poor reward for Bollard's efforts to ensure we have a viable banking system, come what may.