Wages continue to rise at record rates. Photo / NZME
Wages continue to rise at record rates. Photo / NZME
The job market remains tight and wages keep rising at record rates, making at least one more Reserve Bank (RBNZ) interest rate hike a near-certainty.
The ongoing strength in the labour market won’t come as a huge surprise to the RBNZ, but it highlights the size of the challenge toslow the economy and get the inflation rate back down to the target range below 3 per cent.
The Stats NZ numbers “sealed the deal” on at least one more rate rise from the Reserve Bank, ASB senior economist Mark Smith said.
The New Zealand dollar and wholesale interest rates firmed in response to the data. By late morning, the kiwi was at US62.28 cents, up from US62.13c before the release.
The two-year swap rate, which has an influence on mortgage rates, rose to 5.13 per cent from 5.10 per cent.
Unemployment was unchanged in the March quarter at 3.4 per cent, but participation and wage growth rose to new record levels.
The Labour Cost Index or LCI (which measures changes in the cost of labour incurred by businesses, adjusting for changes in the quality, quantity and type of work) was up to 4.3 per cent - up from 4.1 per cent in December.
That was the highest level since the data series began in 1992.
But average ordinary time hourly earnings, measured by the Quarterly Employment Survey (QES), increased 7.6 per cent to reach $38.93.
That’s well ahead of the current inflation rate at 6.7 per cent.
The QES figure is the mean value of wages and salaries paid per hour, so it can rise or fall as the type of work being done changes.
In other words, it captures promotions and people shifting between jobs.
The rises - although firm - weren’t out of step with economist forecasts. In fact, the LCI was slightly lower than some expected.
The labour market remained “white-hot”, ANZ chief economist Sharon Zollner said.
However, LCI wage growth being slightly weaker than expected would be a welcome development for the RBNZ, given its importance for non-tradable inflation, she said.
“Broadly speaking, the labour market is a little tighter than the RBNZ’s February forecast, but not outside the bounds of typical survey volatility.”
It seems likely we are seeing the peak of the employment cycle, with higher mortgage rates expected to slow things through the second half of the year.
About half of all mortgage-holders are yet to roll off low fixed rates.
“The labour market follows the cycle, rather than leads it, hence the strength of the figures was more of an echo of the period of relative NZ economic strength evident in the middle of last year,” said ASB’s Smith.
“There also appears to be an element of catch-up with firms taking advantage of increased growth in the labour supply to meet acute labour market shortages and address capacity bottlenecks.”
But with a recession looming and net immigration rebounding strongly, the turning point for labour market pressures looked to be nearing, Smith said.
“We envisage a growing margin of spare labour market capacity will emerge over the course of 2023.”
Annual inflation was now on the way down and monetary policy settings were already restrictive, but the RBNZ is unlikely to shirk from further monetary tightening and a period of restraint until it is confident CPI inflation will settle in the 1-3 per cent target range, he said.
“We still expect a 25bps [basis point] hike in May and an OCR [Official Cash Rate] peak of 5.50 per cent. However, with greater labour market slack set to open over the next 12 months, we expect the RBNZ will eventually cut the OCR from mid-2024.”
Finance Minister Grant Robertson. Photo / Marty Melville
Against this backdrop, the RBNZ’s May policy decision would probably come down to the Government’s 2023 Budget, due on May 18, and the extent to which it adds to demand-side pressures on the economy, said Abhijit Surya, at Sydney-based Capital Economics.
“In any case, the balance of risks to our forecast for another 25bps rate hike is decidedly skewed to the upside,” Surya said.
Overall, the details of all this data could be summed up by looking at the topline unemployment rate, said Westpac senior economist Michael Gordon.
“The labour market is tight, albeit past its hottest point, and it isn’t deteriorating in any meaningful way yet,” Gordon said.
“Wage pressures haven’t yet peaked on an annual basis, but are getting close to that point.”
