ANZ predicts most aggressive interest rate increases since 2004 as economy overheats

The Reserve Bank is under mounting pressure to raise interest rates amid warnings the economy is overheating. Governor Adrian Orr will announce the next move on August 18. Photo / Mark Mitchell

A sharp fall in unemployment is likely to prompt a series of interest increases in the coming year, as the Reserve Bank tries to cool an overheated economy.

On Wednesday Statistics New Zealand revealed that unemployment dropped to 4 per cent in the June quarter, down from a revised 4.6 per cent in March.

The total number of people unemployed dropped by 17,000 or 12.4 per cent to 117,000, the largest quarterly drop since the household labour force survey was established in 1986.

Underutilisation - a measure which captures unemployment, as well as those working less than they wanted or choosing not to work - also fell sharply. Statistics New Zealand said the number of people underutilised dropped by 48,000 or 13.3 per cent to 315,000.

While economists were expecting a fall in unemployment - and were already broadly expecting the Reserve Bank to hike interest rates this month - the stronger than expected labour market figures saw the kiwi dollar jump as economists predicted an aggressive series of increases in the official cash rate (OCR).

"Today's data shows we've flown past full employment, and the economy
is becoming quite overheated," ANZ chief economist Sharon Zollner said.

"The Reserve Bank needs to hike the OCR promptly to get on top of this."

Both ANZ and BNZ responded to the news by predicting three 0.25 percentage point increases in August, October and November.

ANZ predicted the Reserve Bank would hike rates two more times before the middle of 2022.

This would take the OCR to 1.5 per cent, the highest since mid-2019.

First interest rate increases in 12 months would also represent the most aggressive tightening of financial conditions since 2004, when Dr Allan Bollard was governor.

It comes after the Reserve Bank announced on Tuesday that it planned to cut the amount of high loan to value ratio lending banks can give to owner-occupiers.

It is also developing new lending restrictions, such as debt to income ratios and interest floors, which assess how borrowers would cope with much higher interest rates.

While the fall in the unemployment rate is good news for workers, economists cautioned that it was now at a level which was arguably unsustainable, as businesses would be unable to grow given pressure to pay higher wages.

"It's hard to see the unemployment rate sustainably falling any further," Ben Udy of Capital Economics said.

"We still think the border closure [is] restraining the ability of firms to hire additional workers. Any further tightening in the labour market is more likely to come in the form of higher wage growth rather than lower unemployment."

Politicians traded shots over the news. As well as celebrating the sharp increase in jobs, Finance Minister Grant Robertson pointed to the increase in wages.

"The average hourly wage rose 4 per cent to $34.76 an hour, compared with a 3.3 per cent rise in inflation, meaning more money in New Zealanders' back pockets."

Statistics New Zealand said the labour cost index rose 2.1 per cent in the year to June 30, and while it said half of the roles surveyed for the index saw pay increases in the past 12 months, the index was trailing the household living-costs inflation which rose 2.5 per cent over the period.

Shadow treasurer, National's Andrew Bayly, claimed the figures showed Kiwis were "getting poorer with every pay packet".