Dr Cullen is playing with fire by even hinting that he may suspend monetary policy, and direct the Reserve Bank to stop targeting inflation.
This would be the end of 20 years of bipartisan consensus on monetary policy. It would be a return to the failed policies of the 1970s.
Apart from his overtaxing of NZers, Michael Cullen’s record has been one of a reasonably successful and orthodox Finance Minister. Job growth has been strong, and economic growth has been reasonable (yet below what we need). But if he starts dicking around with monetary policy in some sort of panic over the dollar, he will be returning to Muldoonism.
It would also be seen as a vote of no confidence in the Reserve Bank.
I suspect he is trying to pressure the Governor to not increase interest rates at the next review. According to the law and the agreed policy targets agreement, most market experts are saying Bollard should raise interest rates again – because the latest inflation data was stronger than expected. Cullen is really telling Bollard to ignore the PTA and the law and not to put interest rates up again, with the implied threat of suspending monetary policy if he does.
It will be fascinating to see what Dr Bollard does? If he does not raise interest rates he will be seen to be caving in to Cullen, and if inflation again breaches the acceptable limit, his reputation as Governor will be damaged. But if he ignores Cullen and does increase interest rates, the Government may then intervene which could create a crisis of confidence.