KEY POINTS:
An open letter to Dr Alan Bollard of the Reserve Bank
What's it to be, Alan? Another interest rate rise to satisfy the economists and commentariat who believe your credibility will now be seriously impinged if you don't deal to the Finance Minister?
Or do you carefully weigh the broader consequences of yet another rate hike and take soundings from business people in the real economy, exporters, householders and your own board members before reacting Pavlovian-style to those who say "you have no alternative" if you are to show Michael Cullen that you are the independent master of monetary policy?
You may be stuck between a rock and a hard place.
That's simply what comes with the big jobs.
But you should think carefully indeed before you go public at 9am tomorrow. Most of us would rather you made a truly independent decision rather than be dragged into a "pissing contest" (excuse the vernacular) where, if you do raise rates, that decision will be read as "teaching Cullen a lesson".
If you do decide to leave rates where they are, we are hardly likely to crucify you for exercising an independent decision.
There's plenty who think you should do just that. National Party leader John Key for one - and he owes Cullen no favours.
If you do raise them, we would rather that decision was the result of careful reflection rather than a sense that you have been stampeded into a bad move simply to retain mana with "the market".
The reality is that the game's much bigger than either you or Cullen, and your actions have real consequences for local businesses.
That's where the debate should be. Not one of your respective credibilities.
If you place that much emphasis on your own ego (which I am sure you don't), you should resign, because you have failed to persuade Cullen that monetary policy "needs mates" and get him to reduce Government spending.
Hence the punishment you may dish out tomorrow will have a lop-sided effect on the economy.
Those on the state teat will prosper but business will get that much harder.
You have also failed to stop people paying ridiculous prices for housing.
That will happen anyway when the housing bubble bursts, as it always does. It's all about the extent of the collapse.
You have even failed to bring a rampant dollar under control even though you have intervened at least three times in the forex market since it scored in the mid-US70c range.
Best not to panic at this stage because pushing up interest rates while you are simultaneously trying to nudge the kiwi downwards by selling the dollar is not very smart.
Giant American hedge funds get this. They are among those who are driving much of the carry trade and are lining up for yet another turkey shoot.
That's obvious from the strengthening of the kiwi, which yesterday hit US81c. Read the chatter on currency traders' websites and the blogs of those who follow international speculation. They don't rate us as very bright.
Major trading banks can also be expected to cash in as they shift mortgage rates up again despite the fact that many have already priced in another rate rise.
What's really at issue is what some economists say is an "impossible trinity". Nations cannot simultaneously target domestic inflation, exchange rates and free cross-border capital flows all at once.
At least, not without provoking instability in at least one of the three areas.
So if you want to ensure constant prices, keep inflation under control and ensure free cross-border capital flows, your influence on the exchange rate is lessened if interest rates are raised upwards.
Thus if interest rates go up tomorrow - as most financial markets economists are urging - international investors ranging from Cullen's mythical Mrs Watanabe through to speculative hedge funds will find the kiwi more attractive than other currencies.
It will go up further.
This paradigm is not unique to New Zealand. As the value of sterling rises to reach highs against the United States dollar not seen for almost three decades, Britain (just like New Zealand) has become a magnet for the estimated US$1 trillion ($1.23 trillion) of "hot money" surging round the world.
Australia has similar issues.
If - when you weigh up the issues today - you decide exchange-rate stability and cross-border capital flows are more important in the near term (which is where you appeared to be a few weeks ago), you might have to put domestic price stability on hold.
Would that really matter?
Because trying to manage price stability and exchange rates at the same time would appear to require the imposition of much stronger tools than you have.
No one wants to see currency controls. You have discussed other options with Cullen and Key, before the National leader decided to take his rattle elsewhere.
Maybe it's time to have another discussion. Just don't tell anyone else until decisions are made or you will be said to have compromised yourself.
Why not have another shot at getting Cullen to slash Government spending? The previous Government was persuaded to do just this during the East Asian crisis. In return, you could cut the rest of us some slack on interest rates. Leave them where they are or even reduce them.
Cullen can use other tools to make housing investment less attractive. If the two of you can't do this rather elegant tango, try another alternative.
For goodness sake get Cullen to join us up to the Australian currency quick and form a joint Reserve Bank to run the shop.
Best,
Fran
