In today's email we preview the Monetary Policy statement due out this Thursday, and find out what the Reserve Bank told Bill English about the risks to heavily-indebted first home buyers of a sharp rise in mortgage rates.
1. On hold, for now
The Reserve Bank is expected to hold the Official Cash Rate at 1.75 percent when it publishes its next quarterly Monetary Policy Statement this Thursday.
The focus will be on how soon it expects to start increasing interest rates.
In its last set of forecasts issued in February the bank saw the OCR on hold until late 2019, but most expect that to be pulled forward into 2018 on Thursday, given inflation has been slightly stronger than expected and the currency has weakened since February.
Markets and interest rate watchers will be focused on the tone of the Reserve Bank's comments around the OCR, and whether it drops its neutral tone from its decisions since February.
Its last decision was on March 23 when it said: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."
That was interpreted as a neutral stance, and not that different from the bank's view on February 9 with its last full set of forecasts.
Since then annual inflation has risen from 1.3 percent to 2.2 percent and the New Zealand dollar has fallen 5.5 percent on a Trade Weighted Index basis. Inflation expectations, as surveyed by the Reserve Bank, have also picked up.
The June quarter survey released on Friday showed one year ahead expectations rose to 1.92 percent from 1.56 percent in the March quarter, while two year ahead expectations rose to 2.17 percent from 1.92 percent.
The risk for the Reserve Bank is of a move too quickly back to a tightening stance, given it has had to unwind two tightenings of monetary policy since the Global Financial Crisis because inflation failed to eventuate as it forecast.
"Once again, the RBNZ needs to walk the tightrope of being encouraged by recent developments in inflation, but not so enthusiastic the market brings forward even further its expectations of an OCR hike," ASB Economist Daniel Snowden wrote.
2. A warning on rates
The risks to heavily-indebted first home buyers of a sharp rise in mortgage rates was reinforced by the Reserve Bank in a briefing to Prime Minister Bill English in January, documents obtained under the OIA by the Greens show.
The PM's office asked the Reserve Bank in January for any of its analysis of the effects on households, spending and consumption of an increase in interest rates.
The Reserve Bank's macro-financial policy team said in response that rising debt levels created a vulnerability to rising interest rates.
"Early data from our revised debt to income collection suggests that indebtedness is particularly high among new mortgage borrowers, owing to sharp increases in house prices," they wrote, adding the affordability pressures were most acute in Auckland, where typical debt to income levels for first home buyers were around 5.5.
They wrote a typical first home buyer in Auckland was likely to be committing around 60 percent of net income to servicing their mortgage, while outside Auckland it was around 43 percent.
A mortgage rate increase to 7.5 percent would increase those ratios to over 70 percent and 50 percent respectively. A quarter of other owner occupiers in Auckland would have housing costs of over 70 percent of their net income with a mortgage rate of 7.5 percent, the Reserve Bank advised.
Households would have to cut back on consumption as mortgage rates rose, it wrote.
"Our analysis suggests that, at current mortgage rates, the residual income after mortgage of most Auckland first home buyers is already below our estimates of normal expenditure for a high-income two person household," the Reserve Bank advised.
"As mortgage rates rise, residual incomes of other owner occupiers would also be expected to fall below normal levels. At sufficiently high mortgage rates, a heavily leveraged household would likely be forced to sell their homes if they cannot meet living costs, which is a salient risk for Auckland first home buyers and buyers with high DTIs in general."
3. Pharmac a Budget winner
The slow dripfeed of pre-Budget announcements continued over the weekend with Health Minister Jonathan Coleman announcing an extra $60 million for Pharmac over the next four years.
This would include $20 million extra from the Government in 2017/18 and a further $11 million from District Health Boards, he announced.
4. Duelling housing bids
The election is shaping up as a joint debate about migration and housing. Friday's joint announcements by the Government and Labour about their plans for housing in Hamilton were an early indication of that.
Social Housing Minister Amy Adams announced Housing New Zealand would build an extra 43 two bedroom homes in Hamilton by July.
Within minutes, Andrew Little announced a Labour-led Government would build 200 KiwiBuild and state houses on unused Government land in Hamilton.
5. Tax freedom day
Today is Tax Freedom day, according to Staples Rodway's calculations. That's the day in the year where effectively New Zealanders have finished paying their taxes and can keep the rest of their income.
Staples Rodway calculated this was six days later than in 2016 because bracket creep and other factors had increased tax payments by 9.5 percent.
6. Nukes for South Korea and Japan?
Our Foreign Affairs Editor Sam Sachdeva reported on Friday for Newsroom Pro from a Victoria University symposium on Donald Trump, China and the Asia-Pacific region that the prospects for a de-nuclearised Korean peninsular were not great.
Sam reported that Bilahari Kausikan, an “ambassador-at large” and former Singaporean diplomat, argued that Japan and South Korea would eventually have to develop their own nuclear weapons.
“A balance of mutually assured destruction in North East Asia...not a satisfactory situation for anyone, but it will not necessarily be unstable. In fact it will be more stable I think than the current situation," Kausikan said.
7. Coming up...
Bill English is scheduled to give his weekly post-cabinet news conference on Monday afternoon.
Parliament resumes on Tuesday for the second week in a two week session before a one-week break.
The Australian Budget is due to be released on Tuesday evening New Zealand time.
The Reserve Bank is scheduled to publish its Monetary Policy Statement at 9 am on Thursday.
8. One fun thing
Eugene Gu on Twitter after Emannuel Macron won the French Presidential election decisively:
Le Pen finally ran out of ink. #FrenchElection