On the money: Prince Michael wins battle it's a pity about inflation

By Michael Coote

Friday 27th September 2002

Seated next to incoming Reserve Bank governor Alan Bollard to co-announce the bank's new policy targets agreement, Michael Cullen would no doubt have felt great personal satisfaction. He is now the most powerful person in New Zealand.

Having secured the titles of deputy prime minister, finance minister and treasurer, he has only Prime Minister Helen Clark standing in his way and she has largely been eclipsed by the amount of power in her deputy's hands.

Ms Clark has the political vulnerability of going overseas a lot, always convenient for coup plotters. It has been the nightmare of prime ministers since Sir Robert Muldoon to step off the plane and receive the news their services are no longer required.

Dr Cullen can cap the spending of his ministerial colleagues and has added a further layer of spending control by means of a $2 billion annual surcharge to the economy for his eponymous superannuation fund. He has a tight rein on the purse-strings and thus on the actions of any potential rival.

In opposition, Dr Cullen was a vociferous baiter of the Treasury and the Reserve Bank for their supposedly inappropriate neo-liberal policies. Once in power, he set about dealing with his bugbears.

The Treasury was kneecapped by the appointment of none other than the sympathetic Dr Bollard. The legally independent Reserve Bank was more of a problem and could only be sniped at from the sidelines until mounting international consternation stopped that line of attack.

All comes to those who wait, however, and at last Dr Cullen has his man running the Reserve Bank. In his wake, Dr Bollard leaves behind like-minded persons at the Treasury while to his new job he brings an apparent uncertainty about what his job description means. No doubt Dr Cullen can fill him in on the finer points of what a "forward-looking medium-term focus" requires.

The game is all but complete. We may be returning to an era when the pronouncements of the finance minister carried more weight than those of the central bank governor.

But political jibes can return to haunt their perpetrators. Winston Peters also built a political career in opposition on bagging the Treasury and the Reserve Bank. Once he joined the National-New Zealand First coalition as treasurer, he was more inclined to repeat his department's advice as gospel.

This about-face earned him Dr Cullen's taunt of being "Treasury's poodle." It remains to be seen whether Dr Bollard will earn the epithet of being the treasurer's poodle or the finance minister's Trojan horse.

With the Reserve Bank neutralised, Dr Cullen has engineered the strongest political position in the economy and domestic markets since the Muldoon years.

Market watchers will now have to learn the lexicon of Cullenspeak and the rules of Cullenomics. Savers and investors can make some profit out of the new order.

A slackening on inflation will ultimately boost interest rates. Those living on fixed incomes, who have turned to marginal investments such as contributory mortgages to make up for low interest rates, are more likely to get rates that gladden their hearts at their bank.

Higher inflation also lifts asset prices. Property should get a boost, with higher residential property prices on the way. On the sharemarket, listed commercial property firms will look more appealing on the assumption of increased capital values and rising rents on lease renewal.

In the leadup to the 1987 sharemarket crash, property companies brought some of the biggest windfall gains to punters. While a return to the double-digit inflation that fuelled that boom is unlikely, asset-traders will be encouraged by the looser inflation policy.

By contrast, productive enterprises that need real economic growth may well face higher borrowing costs and difficulty in accessing capital due to speculative misallocation. The prospect of a decade of an average 4% compound economic growth needed to bring New Zealand up to the top half of the OECD table looks more distant than ever.

In the meantime, His Serene Highness the Prince Potemkin will have sealed in his political legacy and his Empress Helen the Great can tour the country with him, admiring the same herd of fat cows he has had driven on ahead each night before to convince her of the prosperity of her realm.

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On the money: Prince Michael wins battle ­ it's a pity about inflation

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