NZ labour market 'balance' caps wage inflation, RBNZ's Bascand says

The largest recorded surge in migration in a century has helped drive New Zealand's economic growth but has also boosted the labour force, keeping a lid on wage inflation, Reserve Bank deputy governor Geoff Bascand  says.

In a speech at Otago University, Mr Bascand said central bank researchers had created a labour utilisation index that showed supply and demand in the labour market "have been broadly in balance since early 2014, creating little upward pressure on wages."

"Stronger-than-expected labour supply and greater-than-expected slack have been factors in our assessment that monetary policy should remain accommodative," he said. "In view of the close relationship between labour market dynamics and inflation pressures, we will continue to monitor a broad range of labour market indicators to help inform our monetary policy decisions."

Annual inflation was just 0.1% in 2015 and is forecast to have picked up to just 0.4% in the three ended March 31, based on the bank's last monetary policy statement. The March quarter consumer price index is due for release on April 18 and will help financial markets assess whether the Reserve Bank will cut the official cash rate on April 28 or hold off until June 9, the two options seen as most likely.

There is a 55% probability that the bank will cut the OCR to 2% this month, and a 45% likelihood it will remain at 2.25%, based on the overnight interest swap curve.

Mr Bascand said much of the weakness in inflation can be attributed to the decline in commodity prices and a high New Zealand dollar "but the higher productive capacity of the economy from rapid growth in the labour force also explains some of the weakness in inflation."

The New Zealand economy has created 180,000 jobs since 2011, driven by population growth and increased participation. In that time the population has increased by about 250,000, with half of that coming from net migration, he said. Average private sector hourly wages rose 0.2% in the fourth quarter for a 2.5% annual increase, government figures in February showed.

"Much of the current surge in migration is explained by weakness in the Australian and world economy that has made New Zealand a relatively more attractive place to live," Mr Bascand said. "Because our labour supply has increased at a time when businesses are facing lower world demand, it results in lower wage and inflationary pressures."

New Zealand has continued to post record net migration, with a 67,400 gain in the 12 months ended February 29, led by arrivals from Australia, China and the Philippines. Migrant arrivals rose 10% to 124,200 in the latest 12-month period, from a year earlier, while departures fell 1% to 56,900, government figures show. Net migration from Australia was a gain of 1600, the highest since September 1991 and the fifth straight month of annual gains.

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(BusinessDesk)