In 2009, in the wake of the financial crisis, the Reserve Bank dropped the OCR to 2.5%. It rose to 3% for a while before it returned to 2.5% after the Christchurch earthquakes; it looks like there will be no more hikes for some time yet. Meanwhile, unemployment has bounced between 6% and 7% since mid-2009, with no clear downward trend. Textbook macro says you can stimulate the economy and lower unemployment by lowering interest rates. Yet there has been little argument for lowering the cash rate further. Why?

The main reason is that has been some inflation, starting with the commodity bubble of late 2010. Annual CPI inflation is currently 4.6%. What core inflation is depends on your preferred definition of core inflation, but the majority of the Reserve Bank's measures put it above 3%, the maximum allowed by the policy target agreement.

What risks would be entailed by loosening of the inflation target? The chance of accelerating inflation is essentially zero. You could grumble about loss of central bank independence, but it's hard to see any loss of credibility caused by bounded loosening in a global economic environment as extreme as this.

Conspirators may note that many of National's donors may be quite happy with a labour market in which high cyclical unemployment turning into high structural employment. I think the explanation is simpler. The Key Government is a small-c conservative government. Its huge poll leads have meant that the safest course of action, in terms of getting re-elected in 2011, was to do as little as possible. Meanwhile, there were no votes for Opposition parties in monetary policy. David Parker finally announced a half-assed monetary policy a couple of weeks before the election, to no response.

The problem for Key is that if he wants a third term, he needs a recovery. One weak quarter a year, like the 0.1% growth in 2Q 2011, is enough to wreck this. Key may have to consider action soon.