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Reserve Bank may push out path for future rate hikes as unemployment stays high

Thursday 9th August 2012

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The Reserve Bank may have to push out its forecast track for higher interest rates as the nation's stubbornly high level of joblessness confounds economists seeing signs of growth in the economy.

New Zealand's unemployment rate unexpectedly ticked up 0.1 percentage point to 6.8 percent in the three months ended June 30, against a forecast fall to 6.5 percent. That gives the central bank less reason to raise interest rates in an economy not yet strong enough to drive employment growth.

"The (central) bank really did expect chunky employment growth and a clear fall in the unemployment rate" in the middle of this year, said Craig Ebert, senior economist at Bank of New Zealand. "The Reserve Bank might back off a bit with its interest rate path."

The benchmark rate has been unchanged for a record 11 straight meetings, since outgoing Governor Alan Bollard sliced half a percentage point from the official cash rate to 2.5 percent in March last year as a form of insurance against the Canterbury earthquake that levelled the nation's second-biggest city.

In June the central bank trimmed its forecast track for the 90-day bank bill rate, often seen as a proxy for the OCR, with the rate unchanged at 2.7 percent until June 2013, before peaking at 3.4 percent in March 2015.

Westpac economists Dominick Stephens and Felix Delbruck said they continue to expect the central bank will keep the benchmark rate on hold until July next year after "a genuinely weak labour market report" that serves as "further confirmation that the economy is operating well below its capacity."

The New Zealand dollar fell more than half a US cent immediately after the figures were released, and recently traded near a week-low 81.18 cents.

Traders are betting the central bank will add just 1 basis point to the benchmark rate over the coming 12 months, according to the Overnight Index Swap curve.

Ebert said the figures were "hard to reconcile with other indicators that are still positive" including the quarterly employment survey, business confidence surveys and gross domestic product.

"This number is important for how people think about the economy, and all that over-optimism is coming out of the system," he said. "We still thought things were becoming a little more encouraging, and this is a clear disappointment."

Today's figures showed the number of people employed shrank 0.1 percent to 2.23 million, short of the 0.3 percent growth forecast by economists.

The participation rate fell 0.3 percentage points to 68.4 percent, after swelling to a three-year high in the March quarter, lower than the forecast 68.6 percent. The number of people not in the labour force rose 1.1 percent to 1.1 million.

The employment data "will be read by the market as opening the door for (the) RBNZ to ease (though we doubt it, bar a shock from Europe)," said Robin Clements, senior economist at UBS New Zealand.

The overall fall in employment, combined with a growing working-age population, resulted in a decrease in the employment rate, Statistics NZ said in its report.

The survey comes after separate government figures this week showed employers added to their payrolls and needed more paid hours in the second quarter.

Today's figures showed a 0.5 percent quarterly increase in total actual hours worked to 73.8 million. Still, that was down 0.4 percent from the same period a year earlier.

New Zealand's labour market has been struggling to recover after the worst recession in two decades came during the global financial crisis, and a series of earthquakes in Canterbury destroyed the country's second-biggest city.

Still, employers turned around their reliance on part-time staff in the quarter, with a 3.4 percent fall in people working shorter hours to 511,000, while at the same time increasing full-time jobs 0.8 percent to 1.72 million. The level of underemployed, which measures people in part-time work seeking more hours, rose to 109,500 from 107,600 in the March period.

The number of jobless people, which includes people available but not seeking work, fell to 271,200 from 273,300.

Auckland's unemployment rate fell to 7.3 percent as more people stopped looking for work, while Canterbury's rate of joblessness increased 1 percentage point to 6.5 percent as the number of employed people dropped by almost 19,000.

Wellington's unemployment rate increased 0.3 percentage points to 6.4 percent as its working age population increased to a one-year high as the region added more jobs in the period.

Northland's unemployment rate of 9.9 percent was the highest in the country, followed by 7.4 percent in Manawatu-Wanganui, and Auckland. Taranaki had the lowest rate at 3.8 percent.

The number of people employed in construction fell to 171,000 from 174,600 in March, while manufacturing dropped to 246,500 from 257,000. The number of professional, scientific, technical, administrative and support service jobs rose to 259,300 from 247,100.

Youths aged 15 to 24 not in employment, education or training (NEET), a target demographic for the government, fell to 13.1 percent from 13.5 percent in the March quarter.

New Zealand's unemployment rate was 14th lowest among OECD nations, behind the Czech Republic's 6.7 percent, and ahead of Israel's 7.1 percent.


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