Key John: Questions for Oral Answer — Questions to Ministers 
Key John: Questions for Oral Answer — Questions to Ministers 
[Volume:628;Page:687] 
4.  
JOHN KEY (National—Helensville) 
 to the  
Minister of Finance 
: Is he concerned that the Reserve Bank governor has this morning raised the official cash rate to its highest-ever level of 7.25 percent thereby leading to higher interest rates? 
Hon Dr MICHAEL CULLEN (Minister of Finance) 
: 
 As the member should know since the passing of the Reserve Bank of New Zealand Act it has been the practice of Ministers of Finance not to comment on decisions made by the Governor of the Reserve Bank so as not to encroach upon his or her decisions. This is the highest-ever level because this is the only tightening cycle since the previous governor abandoned his stupid idea of a monetary conditions index and adopted the standard form used overseas of an overnight cash rate - type approach. 
John Key 
: Was the Minister surprised when the Governor of the Reserve Bank specifically mentioned increasing Government spending as one of the key factors contributing to inflationary pressures in the economy; if so will he now accept that his own actions have played a significant part in the hiking of interest rates today; if not why not? 
Hon Dr MICHAEL CULLEN 
: The member should not confuse fiscal easing simply with Government spending—the Governor of the Reserve Bank referred to fiscal easing. Of course that suggests that the most stupid thing one could possibly do is give a $2-billion-a-year tax cut starting on 1 April next year which was the National Party’s policy. 
John Key 
: Would the Minister be surprised to learn that today at the Finance and Expenditure Committee briefing the Governor of the Reserve Bank described the exchange rate as exceptionally and unjustifiably high—the Minister may remember those terms as they are the criteria set down for currency intervention—would he read into that statement by the governor that intervention in the exchange rate is now imminent and does he support that intervention? 
Hon Dr MICHAEL CULLEN 
: The last part about intervention is of course one for the governor. As to the first part it is not appropriate for me to interpret the comments made by the governor. I am sure that financial markets will draw their own conclusion. As to the previous question I refer the member to page 6 of the report: “further fiscal policy easing over and above what we have allowed for could increase the degree of interest rate pressure …”. 
John Key 
: Does the Minister think that a Reserve Bank that chooses to intervene in minuscule proportions because the exchange rate is exceptionally and unjustifiably high at a time when interest rates are high relative to all other OECD countries at a time when it is likely that billions of dollars of hot money will pour into the currency in Uridashi and Eurokiwi issues and at a time when his Government is increasing spending at a rapid rate will be effective; if so why? 
Hon Dr MICHAEL CULLEN 
: Most of the assumptions in that question were incorrect. In particular for a previous financial market speculator to describe Uridashi as “hot money” when they are actually long-term investments made by Japanese housewives and others shows a fundamental misunderstanding of the international bond market. 
John Key 
: Can he confirm that during his tenure as Minister of Finance nominal Government spending has increased by approximately 40 percent interest rates have risen from 4.5 percent to 7.25 percent and our trade balance and current account have deteriorated to the point where they are in significantly bad shape; if so why is he continuing to increase Government spending and putting further pressure on the economy—or does he not care about exporters and homeowners? 
Hon Dr MICHAEL CULLEN 
: Coming from a member whose leader raised interest rates 51 times while he was the Governor of the Reserve Bank that is a fairly extraordinary question. Yes indeed nominal Government spending has increased about 40 percent but so has nominal GDP increased by slightly more than that. So the proportion of Government spending as a ratio to GDP has actually gone down. 
John Key 
: Why did the Minister have so much to criticise about the current account when he was in Opposition yet he has increased spending at such a rate that it has put pressure on the exchange rate and it is forcing our exporters to the wall and when he is in Government he is as quiet as a little lamb? 
Hon Dr MICHAEL CULLEN 
: I may be an old ram but I am certainly not a little lamb. I have spoken frequently about the current account deficit in recent times and I have spoken about the overvalued exchange rate in recent times but what I never did as the Opposition spokesperson on finance was try to intrude upon the independence of the Governor of the Reserve Bank by inviting the Minister of Finance to comment upon his decisions.