Finance Minister Grant Robertson is playing down the impact proposed new rules on bank lending might have, saying it's merely clarifying what already happens by convention.
Last week newly released documents revealed a proposal for the Minister of Finance - in consultation with the Reserve Bank - to have the power to decide what kind of lending to restrict.
The change would, on the surface, blur the line between the Government and the Reserve Bank, which has operated independently for just over 30 years.
Economist Cameron Bagrie told The AM Show on Tuesday Robertson was "stepping into the realms of the Reserve Bank's operational independence".
"One side would point out the Reserve Bank has got an awful lot of power for unelected officials, and there are aspects of risk around that. If something goes wrong in regard to the financial system... the Government's on the hook. So Grant Robertson, the Minister of Finance, has got a pretty big vested interest in regard to what's going on here in regard to the financial system."
Last year, the Reserve Bank kept the official cash rate (OCR) extremely low to encourage borrowing and investment. At the same time, the Government borrowed billions for the wage subsidy. Both did what they did to keep the economy running as the country went into lockdown to fight the COVID-19 pandemic.
It was a success, with job losses kept well below forecasts and GDP losses minimal compared to countries with large outbreaks like the US and UK - but had the perverse effect of driving already inflated house prices to record highs. This prompted the Government in February to tell the Reserve Bank to at least consider the impact on house prices when it makes monetary policy decisions.
Under the new framework, the Finance Minister would have the power to restrict certain types of lending - such as to property investors.
"Go back and have a look at last year," said Bagrie. "If they had that rulebook in play last year, you can imagine it would have been a completely different story in regard to how the Reserve Bank would have been operating... towards property investors."
It would remain up to the Reserve Bank what tools to use to achieve the Finance Minister's goals.
"What it does is effectively clarify what we already do by convention - which is that the Reserve Bank consults with me as the minister around changes that they make around what's called financial policy and financial stability," Robertson told The AM Show.
"Ultimately the bank still has the role of deciding how a particular tool is used. The Minister of Finance is now going to have a role at the front end on what types of lending restrictions can be put on. That's an appropriate balance."
Treasury recommended more power for the Finance Minister, including choosing what tools to use, which Cabinet rejected.
The proposals are the last stage of a review of the Reserve Bank Act Robertson initiated when Labour came to Government in 2017.
Bagrie said for the most part, the right balance has been struck - with Cabinet finding a middle ground between what Treasury wanted and what's best for the economy.
"What we've seen in the past week is they've put a few parametres around what the framework is going to look like. By and large that framework looks pretty good, with one exception - I'm not sure I agree with the fact the Minister of Finance is now going to be involved in what sort of lending can be restricted, but by and large the framework looks rock solid."
Robertson said it was "no different" to how the Government can tell the Reserve Bank what its goals are.
"The Reserve Bank maintains its operational independence to decide what tool it uses... It's been done by convention, we're now putting it into law. Actually on behalf of taxpayers, it is our job to set the rules... when it comes to monetary policy it's the Reserve Bank that decides what the official; cash rate is, it has that independence.
"But I sign an agreement with the Reserve Bank about the parameters of that - maximum sustainable employment, keeping inflation low. It's no different from that."