1. 8 things that mattered this week

Soon-to-be Acting Prime Minister Winston Peters. Photo by Lynn Grieveson.

US interest rates rose above New Zealand interest rates for the first time as house prices continued to rise here. Winston Peters led the Government in Parliament and is set to become acting Prime Minister. Labour's political vulnerability over justice and corrections issues was exposed. The Public Service staged a "manny-go-round." Shane Jones triggered a debate about Fonterra's future by attacking its performance and chairman. Trump got played by Kim Jong Un, but it may not matter.

1. End of an era?

The US Federal Reserve increased its official interest rate to 2.0 percent on Thursday morning, taking it above the Reserve Bank's Official Cash Rate on 1.75 percent for the first time ever.

The Fed also signaled two more rate hikes this year and three next year, raising the potential for US rates to rise over 3.0 percent while ours stay at 1.75 percent until well into next year. The two rate hikes this year was one more than most expected.

New Fed Chair Jerome Powell said the US economy was going "great" and he saw interest rates beginning to normalise after a decade of surprisingly weak inflation and low-rates-for-even-longer monetary policy. The apparent shift to a more hawkish stance didn't last long though. The extra rate hike seen in the 'dot plots' of expected rates by the various voting members of the Fed's policy setting committee was only there because one of the members changed his or her view. Powell was also less hawkish than expected in his comments after the meeting.

Many also expected last night's European Central Bank meeting to signal the end of an era there too. As expected, the ECB said it would 'taper' its Quantitative Easing programme of bond buying down from 30 billion euro a month now to nothing by the end of the year. That would mean the end of money printing everywhere except Japan.

However, ECB President 'Super' Mario Draghi, told a news conference the bank had no plans to increase its official rates before the European summer of next year (ie late 2019). That was later than expected. European official rates are currently between negative 0.4 percent for deposits and 0.25 percent for lending. Draghi, who pledged during the euro crises earlier in the decade to do 'whatever it takes' to keep the euro and save banking systems, also left the bank's inflation forecast unchanged into next year. The euro slumped and the US dollar rose.

Yet again, all the talk of interest rates 'normalising' and rising is running into the sand.

Earlier this week an article on the New Zealand Herald exhorting borrowers to prepare for higher mortgage rates was among the site's most read.

Yet yesterday, ASB cut its one to two year mortgage rates by between six and 10 basis points ( Interest) New Zealand's 10 year bond yield closed yesterday at 2.96 percent and America's bond yield failed yet again to stay above 3.0 percent. It traded this morning at 2.94 percent.

Ten years after the Global Financial Crisis, interest rates are stuck near record lows because inflation of goods and services prices is dormant. New technology is opening up closed labour markets to the global workforce and driving down the prices of many goods, services and labour.

The only prices still rising are asset prices as investors embed these expectations of low interest rates for longer and private investors avoid (or aren't allowed to take) riskier options to solve supply shortages for housing and infrastructure. The usual solution would be for governments to step up and use their balance sheets to break the logjam while interest rates are so low. But in most countries their public debts are very high.

There is no such excuse here. It is a purely political decision driven by mid-90s-style fears of bond vigilantes who no longer exist. Choosing not to borrow when borrowing costs are below 3.0 percent and tens of billions of infrastructure is desperately needed is the biggest wasted opportunity in a generation.

2. House prices still rising

The narrative around house prices in recent months has been dominated by the Government's various measures to raise housing supply and limit demand from international investors and landlords. Many in the media assume Auckland's relative price stability and the 2017 tightening of LVR restrictions by the Reserve Bank have ended house price inflation.

However, figures from the Real Estate Institute yesterday showed again that house prices elsewhere are still rising strongly and are even edging up again in Auckland.

New housing supply remains well below new population growth as the KiwiBuild programme is still gearing up, and migration has barely dropped.

REINZ's House Price Indices, which strip out the skewing of medians caused by more or less houses selling in certain price brackets, showed inflation outside Auckland ran at an annual rate of 6.8 percent in May. Annual house price inflation rates in Whangarei, Rotorua, Hastings, Napier, Palmerston North, the Hutt Valley and Queenstown was well into the double digits in May.

The slight loosening of LVRs by the Reserve Bank's interim governor Grant Spencer at the end of last year has reheated the market somewhat, while the fundamental mismatch between population growth and housing supply worsens by the month.

This week's Housing Affordability Measures from MBIE reaffirmed that housing affordability continues to deteriorate. The results for the year to March 2017 showed the proportion of households with below average incomes after housing costs rose from 77 percent to 80 percent over the year.

The Government's failure since its election late last year to treat the housing affordability in the same way as a natural disaster or global financial crisis is its main failure so far. Its decision in Budget 2018 not to increase infrastructure spending substantially by using its own strong balance sheet to borrow more is allowing house prices to rise even further away from affordable levels for both first home buyers and renters.

New Zealand's population shock of the last year should have been treated in the same way as the Christchurch earthquakes and the 2008 GFC. It should trigger borrowing to build necessary infrastructure. Instead, the Government is faffing around inventing new Crown-adjacent balance sheets and over-paying for privately funded infrastructure deals that will delay the necessary building for five to 10 years.

That's another half a generation locked out of the housing market and half of the nation's kids growing up with stressed parents in mouldy, cold and ruinously expensive private rentals. Meanwhile, the tax incentives and cheap bank leverage that pumped up house prices (and rentals) remain in place because not enough young, poor renters are voting to change an arrangement that suits older property-owning voters down to their (untaxed) ground.

That was reinforced again on Wednesday when the Government opted for a public-private-partnership for a new small prison at Waikeria that many fear will not be big enough to deal with growing prison numbers. The Labour Government's reluctance to use its balance sheet to deal with this population shock s exactly the same as the previous National Government's reluctance.

Little has actually changed in monetary or fiscal policy terms because of the change of Government, despite a clear vote for change on September 23 last year. Voters may have to wait for 2020 to see the Government change its promises to address the issues, albeit without the wealth taxes necessary to truly address housing affordability.

3. 'Kick out Wilson and restructure Fonterra'

A public debate about a complete board cleanout and a break-up of Fonterra is now alive and well. It was foreshadowed in Rod Oram's column first published on Newsroom Pro on June 1.

Far from dialing back his criticism of Fonterra and its chairman John Wilson, Regional Economic Development Minister Shane Jones repeated his attacks yesterday and was joined in only slightly toned down form by his leader Winston Peters and Labour's Agriculture Minister Damien O'Connor.

Jones launched the attack on Fonterra's performance and governance at Fieldays on Tuesday, and then repeated the comments to journalists in Wellington after a select committee hearing in Parliament. He called on Wilson to step down.

"The leadership of Fonterra I believe, starting with the chairman, is full of their own importance and have become disconnected," Jones said.

"I've been bloody disappointed that Fonterra, in my view, their leadership have not accepted there's been a new Government and there's a new narrative, and I've had a gutsfull of them believing they're bigger than what their writ really is," he said.

"Okay, the CEO has gone, well, that's only one party of the double-dutch that we'd have to put up with in Fonterra over the last nine years," he said.

"I thoroughly believe this, and I've said it elsewhere, as the CEO leaves Fonterra, the chairman in quick order should catch the next cab out of town."

Jones said he was worried about "the absolute absence of accountability for the enormous amounts of dough that the current Fonterra chairman has presided over."

He wants the company to "focus less on interfering in politics and more on justifying the money they've lost overseas".

"I believe that they have become disconnected from the farming community and I said in front of Mr John Wilson that I have requested the Minister of Agriculture - when he looks at his dairy restructuring - identify the issues and whether or not it's time for us to look at a restructuring of Fonterra."

The Government is reviewing the Dairy Industry Restructuring Act (DIRA) , including whether to continue forcing Fonterra to accept milk supplies from any farmer and continuing to force it to supply milk to its competitors. Proposals and law reform are due next year.

Oram wrote about a push by some in Fonterra's leadership to break up Fonterra into processing and brands arms, along with debate over whether Wilson should stay on as Chairman when he comes up for re-election in November. A potential sale of the brands arms would return billions in capital to farmer shareholders.

An exit of Wilson would likely spark a full debate by shareholders and the upper echelon of the company about whether it should be broken up and sold off to help the most debt-laden farmers repay debts that the Reserve Bank has told banks are too high.

4. Tough prison and justice decisions

The Labour-led Government's actions around prisons and justice this week showed how stuck it is between a rock and a hard place.

It wants to reform the sentencing and corrections system to reduce a still-growing prison muster, but the Opposition and Labour's own coalition partner, New Zealand First, argue it cannot change the bail and sentencing laws without being 'soft on crime' and allowing dangerous criminals out into the community.

The Government believes reform is needed to reduce crime, but it can't do it without being accused of being soft on criminals.

Corrections Minister Kelvin Davis finally announced plans for a new prison at Waikeria that will be much smaller than the 'mega-prison' planned by the previous Government. Davis argued 'mega prisons' are more dangerous for inmates and staff, and don't improve recidivism rates.

Instead of the potential 2000-bed expansion planned by the previous Government, a 500-bed high-security facility will be built with half of the cells double-bunked. In addition, a 100-bed mental health unit will also be constructed on the site. The new plan will see the upper Waikeria prison, which has a capacity of 426, shut for good. This means a net gain of just 174 beds when the new prison is completed in 2022, at the cost of $750 million. That's not much lower than the $1 billion cost cited for the expansion.

There are now 10,580 people behind bars, up from around 8000 in 2008. Many are on remand, with the number of remand prisoners jumping following changes to bail laws. By 2021, the population is expected to grow by almost 3000.

Meanwhile, Justice Minister Andrew Little was forced to back down on Monday from his plan to repeal the three strikes law. New Zealand First would not agree, creating the impression of a divided government and a minister who jumped the gun by suggesting a cabinet decision was imminent.

It highlighted the political conundrum for Labour. Dealing with the rising prison muster requires a different approach, but voters don't want changes to sentencing and bail laws. Instead, the easy political option (but tough fiscal option) is to build more prisons.

5. Trump a chump

North Korean leader Kim Jong Un pledged to denuclearise the Korean peninsular in an historic summit in Singapore with US President Donald Trump on Wednesday. The trouble was this was a repeat of multiple previous assurances by various Kims over the decades, none of which North Korea has followed through on.

Kim gave no new detail about how this denuclearisation pledge would be verified or made irreversible. In exchange for nothing substantially new, Trump promised to stop US war-gaming exercises in South Korea, which surprised the South Koreans and the Pentagon.

Trump said he now trusted Kim and they had a "very special bond" that meant this pledge would turn out better than similar ones by Kim's father and grandfather.

“I think, honestly, I think he’s going to do these things,” Trump told a news conference. “I may be wrong. I mean, I may stand before you in six months and say, ‘Hey, I was wrong.’”

As the New York Times reported : 'He paused a moment, realizing how out of character that would be.'

“I don’t know that I’ll ever admit that,” he added, “but I’ll find some kind of an excuse.”

He actually said that. Out loud. In front of 2,000 journalists.

Trump also told Kim North Korea's beaches would make great holiday destinations and that he should consider building a few hotels and condos on them.

Nicholas Kristof's analysis in the New York Times captured the nuances well. He described Trump as having been hoodwinked.

It all may be irrelevant anyway. Trump's performance seemed designed more for his supporters in America ahead of mid-term elections in November. It helped his more nativist followers win primaries against moderate Republicans. That, in turn, may make it easier for Democrats to win back the house and senate in November. Or a revival in Trump's popularity now that he appears to have reduced the threat of conflict (albeit one he helped create) could help his supporters get elected.

Meanwhile, most expect North Korea to renege on any pledge to denuclearise and Trump could just as easily resume military exercises. The end result is Trump gets to look both tough and a peacemaker, and North Korea buys itself some time to either extend its nuclear threat or hope China stops cooperating with American sanctions. Keep an eye on that next week, given Trump is expected to announce new trade sanctions on China that force a change of heart on regional security issues.

6. Winston's almost in charge

This week Prime Minister Jacinda Ardern held her last cabinet meeting and returned to Auckland for the last time before the birth of her first child. Her last official public appearance before her due date on Sunday as a trip by car to Fieldays near Hamilton on Thursday. She has stopped flying to "avoid tempting fate."

That meant Deputy Prime Minister Winston Peters led the Government in Parliament this week and is set to become acting Prime Minister the moment Ardern arrives at Auckland hospital.

Peters highlighted the awkwardness by lodging papers in the High Court that effectively mean the acting Prime Minister will be suing his own Government in a personal capacity for $1.8 million in damages over the public release of information about his pension over-payments before last year's election.

It also highlighted a political conundrum for National and its new leader Simon Bridges. As Newsroom columnist Peter Dunne wrote this week, National can easily attack Peters, but will have to be careful not to burn its bridges again (pun intended).

National's failure to turn its current poll lead into a fourth term was solely because it could not convince Peters to trust its then leaders Bill English, Steven Joyce and Paula Bennett. National could choose to trash Peters again in the hope both New Zealand First and the Greens don't get over the five percent threshold in 2020, which would mean National could govern alone, even if it gets less than 50 percent.

But no party has governed alone since MMP was introduced in 1996. That strategy is also risky if Labour does a couple of neat deals to gift electorates to New Zealand First and the Greens at the last minute, to ensure any sub-five percent votes are not wasted. Labour voters in the likes of Nelson and Northland may find themselves pointed gently in the direction of Green and New Zealand First candidates in the last couple of weeks of campaigning (and voting).

At some point, Bridges will have to make a strategic call whether to go for broke and attack Peters with all guns blazing over the next six weeks, or whether to keep his powder dry and hope Peters discredits himself. Bridges may well be hoping Ardern's maternity leave absence from the ninth floor goes relatively smoothly and quickly for everyone, meaning he doesn't have to make the choice yet.

Regardless, we all wish the best for Ardern, Clarke Gayford and the new addition to the family over the coming days.

7. Jobs for the boys, and one woman

The big news around the beltway in the last week was Tuesday's announcement by the State Services Commissioner that five CEOs (all men) would shuffle into new roles at the top of other Government departments in the coming year.

They included surprise moves by Corrections CEO Ray Smith to head the troubled Ministry for Primary Industries ( MPI ) from November 1, and a move by Ministry of Foreign Affairs ( MFAT ) CEO Brook Barrington to the plum job of Department of Prime Minister and Cabinet ( DPMC ) from February 1 next year. They are replacing CEOs moving to other roles in the public service, or people who had already announced they were retiring or resigning.

Hughes said he decided to announce the package of five new CEOs "to remove uncertainty and maintain momentum in key roles and portfolios". He said the transfers retained strong leadership and stability.

The three other transfers included Justice CEO Andrew Bridgman moving to become Defence CEO from July 1 2019, DPMC CEO Andrew Kibblewhite becoming Justice CEO from February and Culture and Heritage CEO Paul James becoming Internal Affairs CEO from October 1.

However, a lack of diversity in the appointments was criticised by the PSA and Equal Opportunities Commissioner Jackie Blue.

"It's musical chairs for the boys basically, but no one missed out on a chair this time," Blue said. "I would have thought in the modern world we live in, that they would have gone to a contestable and advertised process and they haven't, which is very disappointing," she said.

Others described the moves as a "manny-go-round".

However, Prime Minister Jacinda Ardern did break the pattern with her appointment on Tuesday of Auckland University Professor Juliet Gerrard had been appointed to be the Prime Minister’s Chief Science Advisor from July 1. She takes over from Sir Peter Gluckman , who has held the role since it was established in 2008 and is retiring.

Gerrard is currently the Associate Dean (Research) at the School of Biological Sciences and School of Chemical Sciences in Auckland University. Her appointment was widely welcomed, as Newsroom's Eloise Gibson pointed out in this profile.

8. An abject apology

The other big news around the worlds of politics, government and media in Wellington and Auckland was the Police's apology to investigative journalist Nicky Hager over their raids on Hager's house in the wake of the publication of his Dirty Politics book in 2014.

Hager won damages and an extraordinary apology from police for interventions that sent shivers through the media. Dirty Politics, which linked former Prime Minister John Key’s office with right-wing bloggers such as Cameron ‘Whaleoil’ Slater, was a pre-election bombshell and led to the resignation of then-minister Judith Collins.

After the book was released, Slater complained to police that he had been hacked by Hager’s source - a person referred to only as Rawshark . This led to police raiding Hager’s home in October 2014 to try and find the mysterious hacker’s identity. But that search, which took place while Hager was in Auckland, was deeply flawed.

Police admitted on Tuesday they failed to mention to the judge issuing the search warrant that Hager was a journalist and they were seeking to identify his sources. They also apologised for mining his banking data with only an informal information request and obtaining his information from third parties including Air New Zealand, Paypal, Customs, and Jetstar without telling the companies Hager was a journalist who could claim privilege.

In a stunning admission, police also apologised for telling some companies they suspected Hager of fraud when seeking the information, despite having no basis to do so.

I was also targeted by Slater and found the whole episode deeply disturbing, particularly the way the ninth floor of the Beehive was involved with Slater and the Police's apparent willingness to do the bidding of the ninth floor. This is not a politically partisan issue. The Police have appeared to do the same for previous Labour governments.

The assumed separation between the executive, the Police and the courts is fundamental to our democracy, along with the freedom of the media to report on those three arms of Government. And that separation and freedom was breached again in this case. The 'No Surprises' policy bought in during the Clark-Cullen Government is partly responsible, as is the increasingly politicised nature of the public service.

Both need to be reversed.