Job market surge gives Bollard another reason to raise rates

By BRIAN FALLOW economics editor

The labour market has joined the housing market as a reason for Reserve Bank Governor Alan Bollard to start raising interest rates sooner rather than later.

Employment grew 1.3 per cent in the September quarter, pushing the annual increase to 3.3 per cent. Quarterly employment growth has averaged 0.5 per cent over the past five years.

Despite an increase in the labour force participation rate, from 66.3 to 66.6 per cent, that was enough jobs growth to pull the unemployment rate down from 4.7 per cent in June to 4.4 per cent - a 16-year low.

It was a much stronger result than the markets had expected. They were picking a 0.4 per cent rise in employment and the unemployment rate going up to 4.9 per cent.

It is also almost certainly stronger than the Reserve Bank - already taking a more hawkish view than in its September monetary policy statement - was expecting. In September it forecast an unemployment rate of 5 per cent by March.

"The Reserve Bank's estimates of the economy's spare capacity will have shrivelled accordingly," said Bank of New Zealand economist Craig Ebert. "If GDP growth is to stay robust we wonder where firms will find all of the people required."

The BNZ now puts the odds at 50:50 that Bollard will start to lift rates at the next opportunity, December 4. Financial market pricing puts the chances higher still.

Business sentiment surveys continue to report historically high levels of difficulty finding labour.

And ANZ's job advertisements series recorded a 2 per cent increase in advertising last month. Job ad levels were the highest they had been for two years apart from a brief spike in October last year, ANZ economist John Bolsover said.

"Modest consumer price inflation has contained wage-setting behaviour. Nevertheless there is the potential that in a tight labour market employers will bid up wages as they compete for a limited pool of skilled labour."

Wage and salary rates rose 0.8 per cent in the September quarter, the steepest quarterly increase since 1992, pushing the annual rate to 2.3 per cent.

Westpac economist Nick Tuffley said: "If you throw in the strong employment growth and the higher-than-expected household incomes that flow from that you have the potential for the economy to be a little bit stronger in the near term as well, so the Reserve Bank will be wary of this number."

Bollard indicated last month he was comfortable with the market pricing in a rate rise in the first quarter next year. "There is now a serious risk he will go in December," Tuffley said.