Rising Unemployment and Wage Growth Trends in New Zealand
Rising unemployment in New Zealand and annual wage growth at a two-year low have strengthened the expectations that the Reserve Bank of New Zealand (RBNZ) will cut interest rates before the end of the year. According to Statistics New Zealand, the nation's jobless rate rose to 4.6% in the second quarter, up from an upwardly revised 4.4% in the previous three months. Meanwhile, employment increased by 0.4% compared to the prior quarter. This was better than economists' forecasts, which had predicted a 4.7% unemployment rate and a 0.2% contraction in employment.
While quarterly wage growth increased more than anticipated, with the private sector labour cost index (LCI) excluding overtime rising by 0.9%, the annual wage growth rate fell to its lowest level in two years, at 3.6%.
Implications for the Reserve Bank of New Zealand
These combined trends in wages and unemployment support the market and economists' expectations that the RBNZ will start cutting interest rates before the year's end. Mary Jo Vergara, a senior economist at Kiwibank, highlighted that the data is another piece of evidence proving that a pivot in monetary policy is overdue. She stated, "The labour market has been remarkably resilient over the past two years of restrictive interest rates. But it's important for the RBNZ to stay ahead of any further labour market slowing by proceeding with rate cuts sooner rather than later."
Recent Monetary Policy Actions
Last month, the RBNZ held the cash rate steady at 5.5%, but indicated that monetary policy might become less restrictive over time if inflation slows as expected. The central bank predicts that inflation will return to within the 1% to 3% target range in the second half of this year, down from 3.3% in the second quarter.
Market Reactions
Following the data release, the New Zealand dollar advanced slightly, fetching US$0.5987. The two-year swap rate rose by 9 basis points (bps) to 4.09%, and 10-year yields increased to 4.315% from 4.185%, reflecting the slightly better-than-expected employment numbers.
Michael Gordon, a senior economist at Westpac, remarked, "Overall, there were no real surprises for the RBNZ in these surveys. That in itself is likely to be a disappointment for financial markets, which we suspect were looking for a result that would validate their pricing for an OCR (official cash rate) cut at next week’s Monetary Policy Statement."
