Expectations for big rate cut firm after unemployment rises to 5.1%

Thursday, 6 February 2025

Economists are voicing more confidence the Reserve Bank will stick to its guns and cut the official cash rate to 3.75% on Wednesday week, in the wake of a large rise in unemployment.

Stats NZ reported on Wednesday that official unemployment rose to 5.1% in the final three months of last year, in line with most forecasts, including that of the Reserve Bank.

The number of people it classed as unemployed rose by 7000 from the previous quarter and by 33,000 over the year, to 156,000.

A drop of 32,000 in the slightly separate measure of those in work was the largest since the days of the global financial crisis in 2009.

There were some surprises in the latest wages data, with average ordinary-time hourly earnings in the private sector rising 1.3% over the quarter and 4% over the year, a full percentage point above ANZ’s forecast.

Council of Trade Unions economist Craig Renney believed that could prompt the Reserve Bank — which has strongly signalled a 50-basis-point rate cut on February 19 — to “pause to think”.

But most bank economists assessed it would instead focus on the expectedly weaker aspects of the labour market update and press ahead with its large intended rate-cut.

Westpac responded to the update by cutting the “special” interest rate on its three-year fixed-rate mortgages to 4.99% — which it said made it the first to dip under 5% in the current cycle — and trimming rates on many other loan-terms by either five or 10 basis points.

ASB chief economist Nick Tuffley said the labour market was “weakening in line with market expectations”, with the unemployment rate hitting a four-year high.

That should prompt the “continued front-loading of monetary policy easing” meaning a 50bp cut this month and a further drop in the OCR by mid-year to 3.25%, he said.

Kiwibank senior economist Mary Jo Vergara said the labour market was continuing to soften “amid the backdrop of a very weak economy”.

Without the “required rate relief” from the Reserve Bank, the risk of further reductions in employment would only grow, she said.

Finance Minister Nicola Willis and her Labour Party counterpart Barbara Edmonds sparred predictably over who was to blame for the rise in unemployment.

Willis said she felt for people who had lost their jobs or were finding it hard to find work.

But she blamed the “lingering effects of economic mismanagement by the previous government which drove up inflation and interest rates”.

Edmonds countered that the rise in unemployment had come under National’s watch and after it had promised a better economy.

“All we’ve seen is an economic downturn, rising unemployment, and the sharpest recession, excluding Covid-19, in 30 years,” she said.

Stats NZ spokesperson Deb Brunning said men accounted for 85% of the 32,000 decrease in the number of people in employment over the year.

That reflected “substantial falls in the male-dominated occupation groups of technicians and trades workers and machinery operators and drivers”, she said.

But the unemployment rate among women in the December quarter still remained higher than for men, at 5.2%, versus 4.9% for males.

The unemployment rate in the Wellington region in the final three months of last year jumped to 4.9%, from 3.3% a year earlier, but still slightly below the national average.

In Canterbury it rose to 4.7%, from 3.6% a year earlier.

BNZ research Stephen Toplis saw a further rise in unemployment ahead and said youth were a “major casualty”.

Unemployment in New Zealand had now lifted higher than the OECD average, he noted.

“Youth are often the ‘marginal’ employees, so when economies soften the youth unemployment rate tends to rise faster than that for other age groups. It is no different this time around,” he said.

The “redeeming feature” was many young people had the option of returning to school or higher education and it appeared many were doing that, he said.