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Rising wages not expected to drive up consumer prices

Monday 29th April 2019

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Economists don't expect much change in the employment picture for the March quarter, with rising wages doing little to push up consumer prices, keeping the prospect of rate cuts alive. 

The March quarter unemployment rate was 4.2 percent versus 4.3 percent in the December period, according to the median of economists polled by Bloomberg.  The central bank also expects a slight drop to 4.2 percent. 

Private sector wage inflation - including overtime - is forecast to be 0.5 percent in the three months through March versus 0.5 percent growth in the prior quarter. The data is due Wednesday. 

The central bank has a dual mandate to support maximum sustainable employment and keep annual CPI inflation between 1 percent and 3 percent over the medium term, with a focus on the mid-point of 2 percent.

Annual inflation was 1.5 percent in the March quarter and has been below the mid point since it briefly touched 2.2 percent in March 2017.

Meanwhile, the labour cost index is expected to have increased an annual 2 percent in the March quarter, an unchanged annual pace from the December quarter. Average private sector wages rose an annual 3.7 percent to $29.66 an hour in the December quarter. 

Business confidence surveys show firms have bemoaned the rising cost of wages and difficulty of finding skilled staff for several years. More recently, they've complained about an inability to pass on those costs to consumers, and are bracing for profit margins to get squeezed. 

Reserve Bank governor Adrian Orr cited a slowing local economy and weaker global outlook when he surprised investors at the March review, shifting the central bank from a neutral stance to saying the next likely move was a rate cut. 

While some economists expect a cut as early as next week, others say August is more likely, in particular given the May 8 monetary policy decision and statement is the first that will be published by a new committee, which includes three external and four internal members.

Westpac Bank senior economist Michael Gordon expects the unemployment rate lifted to 4.4 percent. "That would still leave it close to the RBNZ’s estimates of the maximum sustainable rate of employment, but the RBNZ would be concerned if it were heading in the wrong direction," he said.

"The Q1 labour market prints are expected to rebound from their Q4 'weakness', with elevated labour market utilisation and a historically-low unemployment rate," said ASB Bank senior economist Mark Smith. ASB is tipping an unemployment rate of 4.2 percent.

"Our expectation is that the labour market will remain tight over 2019, but that wage growth will fail to fire sufficiently to push medium-term inflation higher," he said.  "We expect 50 basis points of cuts over 2019." 

ANZ Bank New Zealand economist Michael Callaghan expects the unemployment rate was 4.3 percent in the March quarter and says "improvement in the near term seems unlikely with GDP growth subdued." 

He tips private sector wage inflation to be around 2.1 percent year on year, not including overtime, reflecting previous tightening in the market and minimum wage increases. 

"A stable or slightly lower unemployment rate should set the scene for the RBNZ to deliver a downward-sloping OCR track at the May MPS, in line with our expectation for an August rate cut. A higher unemployment rate and subdued wage inflation would add to the risk of a rate cut as soon as May," Callaghan said. 

(BusinessDesk)

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