During that time, monetary policy lost a degree of traction as relatively high policy rates and market returns attracted strong capital inflows, resulting in a high exchange rate and downward pressure on long-term interest rates. Borrowers responded by locking in longer term financing at relatively low rates, thereby reducing the impact of official cash rate (OCR) increases.
This meant that larger increases in the OCR were required to control inflation, putting additional upward pressure on the New Zealand dollar exchange rate. There were loud calls at the time for the use of alternative policy instruments to assist monetary policy.