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NZ labour data has soft underbelly, will keep rate cut prospects alive

Wednesday 1st May 2019

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New Zealand’s unemployment rate nudged lower and annual wage inflation ticked slightly higher. But given the underlying softness, the data is unlikely to sway the central bank from either cutting rates next week or at least setting the stage for a cut later this year. 

The seasonally adjusted unemployment rate fell to 4.2 percent in the three months ended March 31, from 4.3 percent in the December quarter, Stats NZ said in its household labour force survey. The data was in line with expectations. 

According to Statistics NZ, private sector wage inflation, including overtime, rose 0.3 percent in the quarter for a 2 percent annual increase. Economists had expected a 0.5 percent lift. Public sector wage inflation was up 0.6 percent in the quarter for a 2 percent annual gain. 

The annual rise was higher than the annual 1.5 percent lift in consumers price index in the March quarter.  However, wage inflation has been boosted by several collective agreements signed last year, Stats NZ said. A lift in the minimum wage in April 2018 was also having an impact. 

The New Zealand dollar fell to 66.35 US cents from 67.75 just ahead of the data. It was last trading at 67.49.

The employment rate, meanwhile, was 67.5 in the March quarter versus 67.8 percent in the December quarter.

 “New Zealand has seen a softening of economic growth as measured by gross domestic product over the last six months, we are now seeing that softening come through the employment rate,” said labour market and household statistics senior manager Jason Attewell.

The number of employed people eased 0.2 percent in the quarter to 2.658 million and was 1.5 percent higher than a year earlier. The participation rate was 70.4 percent in the March quarter, down 0.5 percentage points versus December and down the same amount on the year.

The central bank is due to publish its latest monetary policy statement on May 8. Given it now has the additional goal of "supporting maximum levels of sustainable employment within the economy" added to its goal of price stability, today data was closely watched.

The bank surprised markets in late March when it said the next move was likely to be a rate cut given the weaker global economic outlook and reduced momentum in domestic spending. Economists, however, remain on the fence whether it could move as early as next week. 

The market pricing now points to a 60 percent chance of cut versus a 40 percent chance just prior to this latest data. 

ASB Bank says it is expecting 50bps of OCR cuts by the Reserve Bank and today’s data increases the probability of a May OCR cut.

"Our expectation is that sluggish GDP growth will likely translate into additional labour market slack and keep wage inflation low, necessitating more policy support."

ANZ Bank economist Michael Callaghan agreed that momentum in the labour market appears to have slowed, consistent with soft GDP data seen over the past year. 

However, while the details suggest a slowdown he doesn't see it as a "game changer for the RBNZ and not a trigger for a May rate cut."   He continues to expect rate cuts to kick off in August. 


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