Could today’s low unemployment number mean another interest rate hike? - Liam Dann

Reserve Bank governor Adrian Orr is presiding over an era of rising inflation and interest rates. Photo / Mark Mitchell

ANALYSIS

The official unemployment rate has risen to 4 per cent - its highest level since June 2021.

But that also equates to the lowest annual rate the country experienced in the decade before the pandemic.

While the direction of travel is up, the slow pace at which it is rising today surprised the market and economists, who had a consensus forecast of 4.3 per cent pencilled in.

That soft number forced the market to pull back on expectations of an early cut to interest rates and has even raised the spectre of one further hike by the Reserve Bank (RBNZ) in February.

While a further hike remained unlikely, the odds were no longer viewed as a “non-zero”, economists said.

However you crunch the unemployment number, it suggests a remarkably resilient labour market in the face of a rapid rise in interest rates and record net migration gains.

As Kiwibank’s Jarrod Kerr notes, there was a very strong migration impact at play in these numbers.

A record annual net migration gain of 128,900 in (the year to November) meant the working-age population rose by 3 per cent, also the strongest ever recorded (back to the start of the series in 1986).

But with jobs growth of just 2.4 per cent, employment can’t keep up, Kerr warned.

“That alone should see unemployment lift further in the coming year as participation in the labour market remains near a record high (71.9 per cent). And then there’s our slowing economy. Firms are no longer hiring with the same gusto as demand wanes under the weight of high interest rates. There’s more pain to come.”

The Employers and Manufacturers Association (EMA) was also quick to warn that the numbers may paint an overly rosy picture of the economy.

“These numbers are from the last three months of 2023. We know anecdotally that the economic situation has further deteriorated, and the real unemployment rate today is likely to be higher,” said EMA head of advocacy Alan McDonald.

“Our AdviceLine, which provides specialist employment advice to our members, has seen the number of calls for restructuring and redundancy support surge by nearly 90 per cent compared with this time last year.”

“Our team were dealing with more than two calls a day in January from businesses who were considering redundancy and restructuring, which is deeply concerning given the start of the year tends to be one of the quieter months.”

It was important to remember rising unemployment levels reflected business owners who were struggling and having to let people go or close, he said.

But, for all that, the data landed on the hawkish side of the equation for those worried about inflation.

The interest rate market, which had priced in an early rate cut from the RBNZ, had its wings clipped by the stronger-than-expected data.

Soon after the release, the two-year swap rate rose to 4.97 per cent from 4.89 per cent, while the New Zealand dollar rallied to US$61.02c from US$60.79c.

ANZ strategist David Croy said the market’s reaction was understandable.

“The data is yet another release showing that the Reserve Bank is making progress towards its goal, but for them, it’s happening a bit too slowly,” Croy said.

“It’s against the backdrop of a Reserve Bank that is losing patience with having to push out the timing of when it expects to get inflation back to the target.

“At the end of last week, the market was pricing in 50 basis points of cuts by August and no possibility of a February rate hike.

“As of today, the market has woken up to the possibility of a February rate hike.

“I think the market has got to a point where, at a minimum, easing is probably going to come later rather than sooner,” he said.

The RBNZ’s goal is to contain inflation within a 1 to 3 per cent range, compared with its last reading of 4.7 per cent for the December 2023 year.

The official cash rate is currently set at 5.5 per cent.

It was now highly unlikely the RBNZ would adopt a stance at its February 28 Monetary Policy Statement that was any less hawkish than it was when it presented its views in November, said BNZ head of research Stephen Toplis.

Stephen Toplis, head of research at BNZ.

In November, the RBNZ retained a tightening bias and indicated it might not lower rates until the second half of 2025.

“The RBNZ has been surprised to the downside with the economy’s growth outlook but downplayed this. It was surprised to the downside with the headline inflation outcome and downplayed this,” Toplis said.

“It’s difficult to imagine that these data will be downplayed given they support the RBNZ’s general sense of nervousness about the economy’s inflationary outlook.”

Wage data released today also remained robust.

The Labour Cost Index (private sector all salary and wage rates) came in at 1 per cent for the quarter and 3.9 per cent for the year.

This was less surprising, Toplis said.

“Employment lags economic activity. Wage growth lags employment. So, it makes sense that wage data continues to reflect past labour market tightness,” he said.

“The good news from an inflation fighter’s perspective is that annual wage inflation continues to fall. And with the unemployment rate increasing, headline inflation falling and the minimum wage growth set at just 2 per cent, we think wage inflation will ultimately end up surprising (the RBNZ included) to the downside.”

- Additional reporting by Jamie Gray.

Liam Dann is Business Editor-at-Large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003.