Cullen admits trying to talk down dollar

Finance Minister Michael Cullen has admitted trying to unsettle "Japanese housewives" by highlighting a provision that could divert the Reserve Bank from its single focus on inflation.

"I think it is useful for overseas investors to know it is in the (Reserve Bank) Act ... I am trying to point out to people there are risks they may not be aware of," he said. They should not expect a one-way bet on the dollar rising.

Dr Cullen began to "jawbone" the NZ dollar lower on Tuesday, and stepped it up on Wednesday with repeated references to the "nuclear" option contained in section 12 of the Reserve Bank Act.

He would not say when section 12 should be used.

Overseas buyers, particularly Japanese investors, have helped drive the currency higher as they chase high interest rates here.

Dr Cullen denied he was sending a signal to Reserve Bank governor Alan Bollard, who is widely expected to lift official interest rates next week.

He also denied there was a currency crisis, but said the high dollar was very serious for exporters.

National finance spokesman Bill English said Dr Cullen's attempts to highlight his section 12 powers were creating a "credibility trap" that risked undermining confidence in the framework of economic management.

"People may not understand his cunning trick, and take him seriously. That will hurt everybody."

National rebuffed again yesterday a NZ First attempt to amend the Reserve Bank Act, which would force the central bank to take into account exports, the dollar and growth when setting official interest rates.

Dr Cullen said he was happy for the NZ First plan to go to a parliamentary select committee that was examining monetary policy. He believed a majority would conclude the current regime remained the best.

A United States economist has attacked the system, saying it created a "death spiral".

Steve Hanke, a professor at Baltimore's Johns Hopkins University, said it was "a dog chasing its tail".

The Reserve Bank lifted interest rates to fight inflation, but that attracted overseas capital, which pushed up the dollar and inflation.

He said New Zealand should peg the dollar to a larger currency, such as the US dollar, or a basket of currencies.

The dollar set a 22-year high of US79.45c yesterday but eased slightly in later trading.

source:www.stuff.co.nz