Why unemployment rate could be bad news for Reserve Bank

Wednesday, 7 February 2024

Stat NZ said the unemployment rate lifted to 4% in the December quarter, from 3.9% in the previous. Some forecasters had expected it to be more like 4.3%.

Stat NZ said the unemployment rate lifted to 4% in the December quarter, from 3.9% in the previous. Some forecasters had expected it to be more like 4.3%.

Average ordinary-time hourly earnings increased 6.9% in the year to December.

The unemployment rate is still expected to increase to more than 5% this year as the effect of interest rate increases is felt on the economy.

The underutilisation rate – which represents people who want to work more than they are – increased to 10.7%.

Jarrod Kerr, chief economist at Kiwibank, said there was a strong migration impact showing through in the numbers and the working age population rose the most ever recorded.

“There are clear signs that the Reserve Bank’s heavy-handed hikes are inhibiting household demand, and hurting business. The labour market stats lag activity in the economy, as employers hold on to employees for as long as they can, before downsizing. And we hearing of businesses downsizing as the economy cools. The data will soften from here,” he said.

But he said there was not enough yet to signal that interest rate pressure could ease.

“At face value, the report today reduces the chances of a here-term rate cut by the Reserve Bank. Thoughts of cuts in May and August will likely push out to November. We're sticking with our call for cuts commencing in November.”

ASB agreed there was a risk that the Reserve Bank would start its cuts later than it had forecast.

They said labour cost growth was much stronger than expected and looked to be plateauing at levels significantly above the Reserve Bank’s 1% to 3% target for inflation.

“The Reserve Bank will be wary of the risk that labour costs do not cool as quickly as to deliver sub 3% inflation on a sustained basis.”

At Westpac, where economists have said the official cash rate was unlikely to be cut this year, economist Michael Gordon said the data would reinforce interest rate cuts being “much further away” than the market was pricing in.

“While its November monetary policy statement forecasts are somewhat dated by now, the recent speech by chief economist Paul Conway suggested that the Reserve Bank has not wavered in its concerns about the risk of inflation remaining stubbornly high.”

“Forward-looking indicators are mixed but overall suggest ongoing loosening. But the fact is, since the “itchy-trigger-finger” November MPS the Reserve Bank has had small but unwelcome upward surprises on consumption growth, non-tradable inflation, QSBO capacity indicators, the labour cost index and now labour market capacity indicators.

“It’s not been one-way traffic, and things are moving in the right direction overall. But the Reserve Bank made it clear in November that the right direction of travel isn’t sufficient. A 25bp hike later this month has become a very real possibility, and Reserve Bank Governor Orr’s speech on February 16 could raise the market-perceived probability of a hike further (now around 20%, up from 5% before the data).”

“It’s not been one-way traffic, and things are moving in the right direction overall. But the Reserve Bank made it clear in November that the right direction of travel isn’t sufficient. A 25bp hike later this month has become a very real possibility, and Reserve Bank Governor Orr’s speech on February 16 could raise the market-perceived probability of a hike further (now around 20%, up from 5% before the data).”