KEY POINTS:
National is accusing the Government of cynical politicking in calling the monetary policy framework into question when it has no alternative to offer.
"They are clearly looking for some way of dealing with cost of living issue through the campaign by pretending that if they relax inflation-targeting somehow people will be better off," National's finance spokesman Bill English said.
"We believe they will be worse off because they will face higher interest rates for longer and faster-rising prices."
In the House on Wednesday, Associate Finance Minister Trevor Mallard said the Reserve Bank Act, now 20 years old, had not worked as well in its second decade as it had in its first.
"Over recent years under both governors [Don Brash and Alan Bollard] inflation has been driven by increased domestic demand that stems from a buoyant housing market, fuelled by cheap foreign capital attracted by a stable economy and relatively high interest rates," Mallard said.
"Now we have inflation challenges driven by record high international prices of food and oil. In both cases the tools available to the Reserve Bank have not been able to address those problems"
The Government was open to looking at alternatives, he said.
But when pressed yesterday about what alternatives there might be and whether a change to the inflation target band might be one of them, Mallard said, "I'm not proposing any change at all and I want to make it absolutely clear no decisions or current proposals are before the Government".
It was clear there was no broad cross-party consensus for change. "But the question is whether there is enough minor party support for something we would want to do," Mallard said.
But as for what that might be: "There will no doubt be a wide range of options. What I have signalled is almost like a determination to look seriously at those options."
He expected the finance and expenditure select committee, which is expected to conclude its inquiry into the monetary policy framework within a month or so would come up with some.
English does not.
It is merely the latest in a series of inquiries, including the Svensson review in 2001.
"And no one has come up with a better way of doing it yet. The Reserve Bank is using the flexibility it has in the policy targets agreement to the point that inflation is forecast to rise to close to 5 per cent," he said.
"We think it is just the wrong time to throw the framework away, because the only reason the Reserve Bank can look through oil and food prices and let inflation rise is because they believe inflation expectations are anchored well below 3 per cent."
If inflation management was thrown out at this critical point in the economic cycle, inflation expectations would rise, interest rates would stay higher for longer and economic recovery would be delayed, he said.
Bernie Fraser - the former Reserve Bank of Australia governor, has raised the possibility that surging oil and food prices might prove to be "not episodic, but structural and secular".
If so it would require central banks to rethink the way they tackle inflation.
The approach of the past 20 years has been to focus on dealing with the kind of inflation which arises from an excess of domestic demand and to look through at least the first-round effects of imported price shocks.
But if those shocks prove not to be spikes but a prolonged up-trend, what then?
English said a debate was under way around the world about how to deal with such large shocks as central banks increasingly struggled to deal with inflation.
"We are quite open to watching how that develops. But at the moment inflation expectations are anchored by the current framework and we wouldn't want to move to another one until or unless it was absolutely clear it was going to give a better result," he said.
"At the moment most of that commentary leads you to the point of view you should have higher and higher inflation. And that is bad for savers, bad for low income people and bad for exporters."
But New Zealand Manufacturers and Exporters Association chief Executive John Walley said a new policy was urgently needed.
"High interest rates available to international speculative capital have driven exchange rates up, devastating returns to exporters, and driving activity and jobs offshore. If we go into the next cycle with the same policy settings, we will lose out again, and more importantly, investment in new products and services will be seen as risky and less activity will result."
Policy pressure
* The monetary policy set-up has been off-limits as a political issue for 20 years.
* That consensus appears to be breaking down.
* But credible alternatives are lacking.
