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UPDATE: Rise in NZ unemployment won't ruffle central bank feathers

Wednesday 1st February 2017

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New Zealand’s unemployment rate pushed back above 5 percent on the back of an ongoing surge in net migration but the news is unlikely to ruffle any feathers at the central bank as the labour market remains robust.    

The unemployment rate rose to 5.2 percent in the three months ended Dec. 31 from a revised 4.9 percent in the September quarter, Statistics New Zealand said. Economists had been expecting the unemployment rate to ease back to 4.8 percent.

Employment grew 0.8 percent in the quarter to 2.51 million, outpacing the 0.5 percent increase in the working-age population to 3.76 million. The participation rate hit an all-time high of 70.5 percent, also bolstered by the record migration.

Data this week showed annual net migration hit a record high of 70,600 in December 2016, with migrant arrivals up 4 percent to 127,300 in the year.

“We continue to expect the RBNZ to hold the official cash rate at 1.75 percent at next week’s monetary policy statement, with the underlying data showing the labour market is still robust despite the uplift in the headline unemployment rate,” said ASB Bank chief economist Nick Tuffley.

The Reserve Bank cut the cash rate by 25 basis points to 1.75 percent in November and forecast rates would remain steady through 2019. While it is widely expected to keep rates on hold next week, recent data – including news that inflation is back in the central bank’s 1 percent-to-3 percent target band for the first time in two years -  had led some market participants to predict the bank rejig its forecasts to show earlier rate increases.

Wednesday's employment data, however, also pointed to muted wage inflation and “given the market has been pushing the idea of the official cash rate potentially being lifted later this year, today’s data should see it pause for thought,” said ANZ Bank New Zealand chief economist Cameron Bagrie.

While he noted business surveys and anecdotes suggest the labour market has continued to tighten, “until clearer evidence of stronger wage growth emerges we doubt the RBNZ will want to front-run a tightening cycle. Hikes still look more likely to be a 2018 story.”

Annette Beacher at TD Securities said data took some of the heat out of the New Zealand dollar as market pricing for rate hikes pulled back a bit. The New Zealand dollar recently traded at 72.94 US cents versus 73.38 cents immediately before the figures were released.

Kiwibank chief economist Zoe Wallis said the "data emphasises that there is no rush for the RBNZ to lift the OCR and expect rates to remain on hold until 2019 – in contrast with financial market pricing which suggests a hike by November 2017."  

Wallis also warned the ongoing gain in migrants might be a bigger headache than the central bank expects. If it remains elevated near current levels of 70,000 a year for another six months “we need to see further gains in employment in order for these people to find work, particularly given the vast share of net migrants are of working age (i.e 15yrs and older),” she said. It will also mean there is little pressure on employers to raise wages.

In the November monetary policy statement, the central bank forecast unemployment would be at 4.7 percent in the March 2017 quarter before easing to 4.5 percent over the 2018 and 2019 March quarters.

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