Rise in labour force helps boost prospect of cash rate cut

The 5.8 per cent March quarter unemployment rate was higher than the Reserve Bank had expected. Photo: Christine Cornege.

Weaker-than-expected wages data and further fall in dairy prices add to impetus.

Employment grew strongly in the first three months of the year but labour force growth was stronger still, keeping wage inflation subdued and raising the odds of an interest rate cut.

The number of people employed grew 16,000 or 0.7 per cent in the March quarter, making 74,000 and 3.2 per cent for the year - half of them in Auckland.

But the labour force (those either employed or actively seeking work) increased by 19,000 in the quarter. That raised the number of unemployed by 3000 to 146,000, its highest for a year, for an unemployment rate of 5.8 per cent, unchanged from the December quarter.

The market and the Reserve Bank had expected 5.5 per cent.

The labour supply has been boosted by strong net immigration and by the participation rate (the proportion of people over 15 who are in the labour force) hitting a high of 69.6 per cent.

That increased the amount of slack in the labour market so that wage growth was also weaker than the Reserve Bank expected. Its preferred measure rose at an annual rate of 1.8 per cent instead of the 2 per cent the bank forecast in March.

"Still, we need to bear in mind that 1.8 per cent inflation in the labour cost index is not at all weak," said Bank of New Zealand economist Craig Ebert.

Only 10 per cent of private sector salaries and wage rates increased in the March quarter, and while it is a seasonally weak quarter for pay rises, that is the smallest proportion for five years; 43 per cent of pay rates have not increased at all over the past year.

Reserve Bank governor Graeme Wheeler said last week that it would be appropriate to lower the official cash rate "if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target".

After yesterday's weaker-than-expected wages data and the further fall in export dairy prices the odds on a rate cut are rising.

ASB economists now think the central bank's conditions will be satisfied later this year and put a 60 per cent probability on two OCR cuts, most likely starting in September.

Deutsche Bank chief economist Darren Gibbs thinks the March labour market data would be a "material disappointment" to the Reserve Bank and that its June statement will provide sufficient rationale for some policy easing and no obvious case for delay.

Gibbs is forecasting 25 basis points of OCR cuts in both June and July.

The money market is pricing just over 25 basis points of OCR cuts by the end of the year - or equivalently a 50:50 chance of two cuts.

Meanwhile, the quarterly employment survey, also published yesterday, recorded average ordinary time earnings were $28.77 an hour, unchanged from the December survey but up 2.1 per cent for the year. The consumers price index rose just 0.1 per cent over the year.

Combined with the increase in employment, total weekly gross earnings (an indicator of households' collective labour income) was up 6 per cent on the March quarter last year.

Westpac economist Satish Ranchhod said the labour market data had increased the risk of an OCR cut this year.

"But on balance, we think economic growth and the housing market will remain too strong for the Reserve Bank to pull the trigger," Ranchhod he said.

"But we must admit, it will be a finely balanced decision."