KEY POINTS:
Finance Minister Michael Cullen has floated the idea of a levy on mortgages to drive down inflation.
Fixed rate mortgages mean that Reserve Bank interest rate rises take a few years to have an impact while a levy would be an additional interest rate charge on all borrowers.
The idea was raised in a Treasury-Reserve Bank report and Dr Cullen said it had merit.
"I think that's one area which is worth further investigation at this point," he told Radio New Zealand today.
"Even then my strong reservation is it impacts primarily upon homeowners with substantial mortgages and there's a degree of inequity in that but then that's always been true of monetary policy."
But BNZ chief economist Tony Alexander was sceptical about the chances of it being introduced.
Dr Cullen said the levy would be another mechanism for adjusting mortgage interest rates.
"And therefore with more immediate impact on demand and less transmission through, for example, the exchange rate impacting upon the tradeable sector."
About 80 per cent of mortgages are fixed term.
The Reserve Bank raises interest rates to try dampen down the housing market but that impacts on exports as the high rates result in more currency speculation inflating the dollar.
"The growth becomes more demand led and less export led," Dr Cullen said.
"So far I think the orthodox has been you have to bear through that pain until monetary policy finally works. But it's interesting I think in each cycle it's taking longer and longer for monetary policy to work and I think we've seen that particularly in this cycle."
Dr Cullen said the change would need wide support.
"The Reserve Bank Act and monetary policy has been very much a sort of broadly consensual area of policy and I wouldn't want to move away from that."
National Party finance spokesman Bill English said the idea would be unpopular.
"If you tell people in New Zealand that they are going to get an extra 1 per cent put on top of their fixed interest mortgage they would regard that as a breach of trust and everything they considered to be an orderly framework for doing their business," he told Radio New Zealand.
He blamed increased Government spending for the interest rate problem.
"If Dr Cullen would pull back his big spending surge then we'll see what happens to interest rates and the dollar and if there's still a problem in 12 months time then maybe you'd look at it.
"But I don't believe Dr Cullen has done what he can with fiscal policy nor do I believe that monetary policy has been shown to be useless. Dr Bollard (Reserve Bank governor Alan Bollard) has had eight chances to put up interest rates and he hasn't."
BNZ chief economist Tony Alexander told Radio New Zealand the move would mean no one would want fixed rate mortgages.
"'Fixed interest rates would disappear from the mortgage offering in New Zealand so, while it would be something that I think over the longer-term would be positive for export development by limiting the time the kiwi dollar remains high, it would be exceedingly negative for the housing market."
"I put the chances of a fixed rate levy coming in close to zero because it would affect something like 1.2 million people out there, or at least that's the number of loans we have.
"There wouldn't be many votes in it," he told Radio New Zealand.
Export New Zealand chief executive Bob Walters said the idea was worth considering.
"What we are looking at here though is the absolute need to increase our foreign exchange earnings through exports and international business in order that we can maintain the standard of living that we require in New Zealand."
Real Estate Institute president Murray Cleland said he did not think the idea would float and he would be strongly against anything that put hurdles in front of people trying to buy homes.
"I don't think it's a goer. I think that it needs a lot of thought and effort put into it but I can't see it being a goer."
Dr Cullen's comments on Radio New Zealand caused a dip in the value of the NZ dollar, from around US68.65c shortly before 8am to about US68.40c, 30 minutes later.
- NZPA
