Rise in unemployment won't ruffle central bank feathers

New Zealand’s unemployment rate pushed back above 5% on the back of a continuing surge in net migration but the news is unlikely to ruffle any feathers at the central bank as the labour market remains robust.    

The unemployment rate rose to 5.2% in the three months ended December 31 from a revised 4.9% in the September quarter, Statistics New Zealand said. Economists had been expecting the unemployment rate to ease back to 4.8%.

Employment grew 0.8% in the quarter to 2.51 million, outpacing the 0.5% increase in the working-age population to 3.76 million. The participation rate hit an all-time high of 70.5%, also bolstered by the record migration.

Data this week showed annual net migration hit a record high of 70,600 in December 2016, with migrant arrivals up 4% to 127,300 in the year.

“We continue to expect the Reserve Bank to hold the official cash rate at 1.75% at next week’s monetary policy statement, with the underlying data showing the labour market is still robust despite the uplift in the headline unemployment rate,” ASB Bank chief economist Nick Tuffley said.

The Reserve Bank cut the cash rate by 25 basis points to 1.75% in November and forecast rates would remain steady through 2019. Although it is widely expected to keep rates on hold next week, recent data – including news that inflation is back in the central bank’s 1-3% target band for the first time in two years – had led some market participants to predict the bank would rejig its forecasts to show earlier rate increases.

Wednesday's employment data, however, also pointed to muted wage inflation and “given the market has been pushing the idea of the official cash rate potentially being lifted later this year, today’s data should see it pause for thought,” ANZ Bank New Zealand chief economist Cameron Bagrie said.

While he noted business surveys and anecdotes suggest the labour market has continued to tighten, “until clearer evidence of stronger wage growth emerges we doubt the Reserve Bank will want to front-run a tightening cycle. Hikes still look more likely to be a 2018 story.”

Annette Beacher at TD Securities said data took some of the heat out of the New Zealand dollar as market pricing for rate hikes pulled back a bit. The New Zealand dollar recently traded at 72.94USc versus 73.38USc immediately before the figures were released.

Kiwibank chief economist Zoe Wallis said the "data emphasises that there is no rush for the Reserve Bank to lift the official cash rate and expect rates to remain on hold until 2019 – in contrast with financial market pricing which suggests a hike by November 2017."  

Ms Wallis also warned the continued gain in migrants might be a bigger headache than the central bank expects. If it remains elevated near current levels of 70,000 a year for another six months “we need to see further gains in employment in order for these people to find work, particularly given the vast share of net migrants are of working age (that, is 15 years and older),” she said. It will also mean there is little pressure on employers to raise wages.

In the November monetary policy statement, the central bank forecast unemployment would be at 4.7% in the March 2017 quarter before easing to 4.5% over the 2018 and 2019 March quarters.