VZCZCXRO9264
PP RUEHNZ RUEHPT
DE RUEHWL #0529/01 2031932
ZNR UUUUU ZZH
P 221932Z JUL 07
FM AMEMBASSY WELLINGTON
TO RUEHC/SECSTATE WASHDC PRIORITY 4488
INFO RUEHBY/AMEMBASSY CANBERRA PRIORITY 4888
RUEHNZ/AMCONSUL AUCKLAND PRIORITY 1402
RUEHBN/AMCONSUL MELBOURNE PRIORITY 0091
RUEHPT/AMCONSUL PERTH PRIORITY 0012
RUEHDN/AMCONSUL SYDNEY PRIORITY 0547
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHRC/DEPT OF AGRICULTURE WASHDC PRIORITY
RHHMUNA/CDR USPACOM HONOLULU HI PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY 0165

UNCLAS SECTION 01 OF 02 WELLINGTON 000529 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
EAP/ANP, EB, INR, PACOM FOR J01E/J2/J233/J5/SJFHQ 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD PGOV PREL AS NZ
SUBJECT: FINANCE MINISTER THREATENS TO OVERRULE RESERVE 
BANK GOVERNOR 
 
REF: A) WELLINGTON 452 B) WELLINGTON 365 
 
1) (U) SUMMARY: New Zealand Reserve Bank Governor Alan 
Bollard is widely expected to increase the official cash rate 
(OCR) to a new high of 8.25 percent this coming Thursday. 
Finance Minister Michael Cullen has threatened to override 
the Bank's legal mandate to raise interest rates that keep 
inflation under three percent. Cullen's threat has created a 
political and economic tempest for the Labour government. End 
Summary 
 
2) (U) New Zealand's economy continues to grow faster than 
expected, pushing housing prices and inflation upward. To 
control this expansionary pressure, The New Zealand Reserve 
Bank (RBNZ), under Governor Alan Bollard, has ratcheted up 
the Official Cash Rate (OCR) to 8.00 percent, one of the 
highest levels among OECD countries. This has put exporters 
under increasing pressure as the 22-year record high Kiwi 
dollar reached 79.45 US cent mark this past week. One analyst 
said that the rocketing exchange rate has put the New Zealand 
economy in a "death spiral." While most analysts offer a more 
moderate assessment, business leaders, the media, and the 
political opposition have been loudly attacking the 
government for failing to bring this problem under control. 
 
3) (U) In open Parliamentary discussion last Wednesday, July 
18, Finance Minister and Deputy Prime Minister Michael Cullen 
mentioned that Section 12 of The Reserve Bank Act (RBA), 
passed in 1989, did empower the government to override the 
Bank's requirement to control interest rates for the sole 
purpose of keeping inflation between one and three percent. 
His comment came when a member of one of the Labour 
Government's supporting parties, New Zealand First, raised 
the possibility of amending the RBA to change the RBNZ's 
policy targets. The proposed amendment did not have 
Government support and received criticism from both sides. 
However, Cullen has maintained since then that Section 12 
exists for "a purpose" and broadly hinted that he will invoke 
Section 12 to prevent a raise in the interest rate if deemed 
necessary. 
 
4) (SBU) The Reserve Bank Act (RBA), passed in 1989, was one 
of the most important steps the GNZ took to stabilize its 
economic and political policy in the wake of what New 
Zealanders universally regard as the disastrous and highly 
inflationary political management of the economy in the 
1980's. For that reason, commentators have expressed almost 
horror at Cullen's open discussion of overriding the Act's 
disciplines through resort to invoking Section 12. This 
section of the RBA gives the Finance Minister the ability to 
override the RBNZ's stated policy targets and replace them 
for a specified period no longer than 12 months. After the 
end of the specified period the policy targets must be 
rewritten, but do not have to be the same as the previous 
targets (i.e., one to three percent inflation range). In this 
way it functions as a safety value for extreme unforeseen 
circumstances. 
 
5) (SBU) COMMENT: Prime Minister Clark has stood virtually 
alone in saying that Cullen's remarks are worth considering. 
This initiative, even if it is only a feint, shows the 
increased pressure the Government is feeling from exporters 
who are getting squeezed by the rising exchange rate (see 
reftels). At the same time, Cullen most likely is hoping that 
the mere mention of Section 12 will frighten arbitrageurs 
enough to sell now, decreasing pressure on the exchange rate. 
The current rate of return for the NZ dollar and the prospect 
of even higher returns if the interest rate is increased are 
simply too attractive for investors to back down because of 
mere force of posturing. 
 
6) (SBU) If Minister Cullen were to intervene it would surely 
undermine the independence of the RBNZ and drastically upset 
confidence in the GNZ's ability to maintain a stable monetary 
policy. The cost would be too high and could possible induce 
a hard landing of the Kiwi dollar that the GNZ and the RBNZ 
want to avoid. Invoking Section 12 is too politically and 
economically costly to be probable. Some political analysts 
saw Cullen's willingness to openly discuss Section 12 simply 
as a mollifying gesture to its political partner the New 
 
WELLINGTON 00000529  002 OF 002 
 
 
Zealand First Party, as one the parties whose support Labour 
needs to govern. Others see it as just one more indication 
that Labour is growing increasing desperate trying to improve 
its weak political standing. End comment. 
 
 
KEEGAN