KEY POINTS:
Finance Minister Michael Cullen appears to be playing down the prospect of the Government intervening to halt future interest rate rises, but is continuing to warn overseas investors that he can take the drastic action if he wants to.
Dr Cullen yesterday came under pressure at Parliament to reveal his true intentions after he highlighted a little-known section of the Reserve Bank Act that allows the Government to change the way interest rate decisions are made.
It would be a bombshell for financial markets if the Government did step in to stop the Reserve Bank from raising interest rates again next week and to stem the rise of the New Zealand dollar.
It is widely thought that Dr Cullen is simply trying to unsettle speculators who have pushed the New Zealand dollar to record highs.
Yesterday Dr Cullen said he felt that people in the markets needed to be aware that there were a number of mechanisms that could be used by the Reserve Bank or the Government when it came to monetary policy.
Section 12 of the Reserve Bank Act - which allows the Government to force the central bank to base its decisions on factors such as the exchange rate rather than inflationary pressure - was one of those mechanisms.
"It is those who are making money out of speculating New Zealand's currency who want certainty," Dr Cullen said. "It is not the job of myself or the Governor to create that certainty for them."
But if Dr Cullen's comments were designed to talk the New Zealand dollar down, they failed. The kiwi hit a new post-float record yesterday at US79.45c and remained above US79c for the day.
Under questioning from National leader John Key yesterday, Dr Cullen insisted he had not actually raised the prospect of the Government intervening to direct the Reserve Bank, but rather he had not ruled out taking the action. "That is not the same thing," he said.
Dr Cullen said the soaring currency represented a difficult situation because the US dollar was weak, and no fiscal or monetary policy move in New Zealand would lift the greenback.
The Finance Minister's talk about Government intervention has drawn strong criticism from political opponents, and yesterday former Reserve Bank Governor and National Party leader Don Brash warned such a move risked putting upward pressure on mortgage rates.
He said that giving the Reserve Bank a target other than lowering inflation could "dramatically" raise the longer-term interest rates that fixed-rate mortgages were based on.
"Alan [Bollard, Reserve Bank Governor] has to get on top of domestic inflation. The quickest way of getting the exchange rate down is to make it unambiguously clear that the Reserve Bank will do whatever it takes to get domestic inflation under control."
But New Zealand First leader Winston Peters said Dr Cullen should take action to relieve the pressure on exporters.
National's finance spokesman, Bill English, called on Dr Cullen to outline the conditions which would trigger his intervention, or to state clearly that he had no intention of intervening.
