KEY POINTS:
For a Reserve Bank Governor trying to cool the housing market and curb the shopper's enthusiasm, the news this week was all bad.
And bad news for Alan Bollard will be bad news for exporters if it means interest rates staying up, keeping the dollar's value painfully high.
Retailers enjoyed a good September quarter. Sales rose 1.8 per cent - excluding car yards and service stations - the biggest rise for more than a year.
The housing market, which had been looking a bit subdued, felt the joys of spring, sending the September median house price to nearly 10 per cent above where it was a year ago. Turnover rose and the average time it takes to sell a property fell.
The problem for Bollard is that he wants a couple of years of consumer spending and house prices staying steady to ease inflationary pressure which has built up in the economy.
Through 2004 and last year, he raised the Reserve Bank's official cash rate from 5 per cent to 7.25 per cent in an attempt to slow things down but the response has been - as this week's figures show - sluggish ... so sluggish as to raise the question:
Does monetary policy still work? Or have the brakes failed?
Even Finance Minister Michael Cullen and Opposition leader Don Brash, who don't agree on much, were of one mind last week: It would be good if the bank could curb inflation without spear-tackling exporters, and that there needs to be a debate about whether the bank has all the tools it needs to do the job.
As former Governor Brash remembers all too well from the mid-1990s there is a connection between short-term interest rates and the exchange rate.
Two more-recent developments have compounded the Reserve Bank's problem. They are the switch from floating to fixed mortgage rates and a tighter labour market.
Nearly 69 per cent of home loans are at fixed rates.
In the 1990s, when most mortgages were at floating rates - which rise or fall almost as soon as the official cash rate does - the governor could in effect reach into the pockets of people with mortgages and take spending power out of the economy, or put it back.
With fixed-rate loans the effect of OCR changes is delayed.
And it is diluted, because the wholesale interest rates the banks pay for the money for such loans depend not only on what the financial markets expect the New Zealand central bank to do, but their expectations of other central banks' moves as well. That is because much of the money for such loans is provided by overseas savers, who are influenced by the difference between our interest rates and those available elsewhere.
For much of the past few years, Bollard has been frustrated by the fact that when he was trying to tighten the reins, his counterparts overseas were running easy monetary policy, creating a world awash with money looking for a high-yielding home and finding it in New Zealand.
There is a risk that being out of sync in this way could be mistaken for a more fundamental problem with New Zealand's monetary policy.
Raising the official cash rate may not have much immediate effect on households with mortgages but it does on businesses.
But because unemployment is at its lowest in a generation and memories of acute skill shortages are fresh, firms have been reluctant to shed labour out of fear that when business picks up they won't be able to hire the staff they need.
This has created a sense of job security that has tended to insulate households from the chilly winds felt by businesses, making it harder for the Reserve Bank to get at the consumer.
If interest rates aren't working very well, what might?
A forum of overseas and local economists convened by the Reserve Bank and the Treasury in June to debate the issue didn't come up with any firm answers.
Indeed some of the overseas participants were inclined to argue that it ain't broke, so don't fix it.
Delegating the right to set GST
John McDermott, an associate professor of economics at Victoria University and former chief economist of the ANZ National Bank, said one option discussed was for Parliament to delegate the right to vary the GST rate.
The current 12.5 per cent rate would become the "neutral" rate which can be dropped perhaps to 10 per cent when demand needs a boost or raised to 15 per cent when the economy is overheating and it is desirable to slow spending.
But to whom would the Government give the power of varying the tax?
If it was not the Reserve Bank, there could be two bodies trying to manage the economic cycle, potentially reading data differently and getting in each other's way.
But if the power was given to the bank, the Government could be tempted to add conditions such as consulting the Minister of Finance which could compromise the bank's operational independence.
"All kinds of public backlash would be possible," McDermott said.
"And if it looked like the rate was about to be raised it could prompt a surge of consumption to get in ahead of it, at precisely the time you were trying to slow things down."
A mortgage interest levy
Another possibility, considered but not endorsed by a joint Treasury and Reserve Bank investigation of the issue this year, is a mortgage interest levy.
When required, it would be used to push up the mortgage rates borrowers pay.
But the extra money would in effect be a tax and not go to foreign savers, reducing upward pressure on the exchange rate.
Officials saw several problems with the idea.
Because it would only apply to mortgage debt, an industry would spring up to get round it, for example by structuring what were in effect home loans as business loans.
There would also be a risk of borrowers shifting to overseas banks beyond the New Zealand tax net.
Bank of New Zealand chief economist Tony Alexander said a measure like this might gain more support if it was seen in the context of lifting the country's export performance - an area where the economy has hugely underperformed in the past 20 years - rather than as making the central bank's life easier.
Limiting the amount banks can lend
Another suggestion was that the Reserve Bank should be able to vary how much of the value of a property banks are allowed to lend to buyers.
But that would disproportionately affect first-home buyers and those on low incomes.
Should we look for structural changes instead?
Some economists say that rather than looking for additional weapons for the Reserve Bank's armoury, policy makers would do better to tackle the fundamental causes of New Zealanders' preference for investing in housing rather than businesses or financial assets.
Tax laws, for example, favour investment in residential properties by allowing negative gearing and imposing no capital gains tax.
The OECD's Val Koromzay told the June forum that such tax preferences served no obvious social purpose. They enriched owners but were capitalised into higher land prices, leaving buyers no better off.
The required changes were not electoral winners, he conceded, but some OECD countries had reduced the tax distortions by phasing the changes in and making new tax laws apply to only new purchases.
Or the problem could be tackled from the other side by reducing tax, regulatory or other disincentives to investment by and in businesses.
The greater business's capacity to meet consumer demand, the less need there is to restrain it.
Is it really such a big problem?
Some of the overseas brains picked at the June forum counselled against tampering too much with a monetary policy framework that generally worked well.
Klaus Schmidt-Hebbel of the Central bank of Chile pointed out that over the past 20 years real house-price growth in New Zealand had averaged just under 4 per cent, similar to Australia's, and over the whole period house-price inflation had been less volatile than in comparable countries.
And McDermott said that after all, while the housing market's response to the most recent tightening may be taking a long time, overall the economy had slowed, and inflation and inflation expectations were coming down.
What we owe
New Zealanders' borrowings:
* Total mortgage debt: $123 billion.
* Up from $108 billion a year ago.
* At fixed rates: $101 billion.
* Average household debt: 1.5 times disposable income.
* Ten years ago: 0.9 times average income.
* Households spend $1.15 for every $1 of income.
