Pointing down

It’s been just over a week since the RBNZ’s October interest rate decision. At that time, the RBNZ kept the OCR on hold at 2.75% and reiterated that some further easing was likely. However, they noted that the timing of any further easing would be dependent on the flow of data. Developments over the past week have shifted the balance further in favour of a December cut, but it’s still not a done deal.

First up, the latest update on the labour market showed a continued loss of momentum in economic activity, and that the economy is operating with some spare capacity. Over the September quarter, the number of people employed in the economy fell by 0.4% - the first quarterly decline in employment since 2012. It’s true that labour market data can be volatile on a quarter-to-quarter basis. But even looking at the more stable annual measures of labour market conditions, we see very clearly that the labour market has been weakening. Employment growth has fallen back to 1.5% on an annual basis – well down on the above 3% rates of growth we saw last year. This softening in demand for workers has seen the unemployment rate pushing up to 6.0% and the number of unemployed people climbing to its highest level since June 2013.

On top of this, we’re still looking at some tough times in the dairying industry. Dairy prices have fallen in the last two auctions, retracing about a quarter of their earlier gains. It seems that markets are unconvinced about the impact that El Niño conditions could have on global milk supply, especially as the major milk producers in the Northern Hemisphere ramp up their own productive capacity. The RBNZ has noted that they are taking a cautious approach in relation to dairy prices, and it looks like that caution has been warranted.

Next up are conditions in the housing market. This is a particularly thorny issue for the RBNZ, as reductions in the OCR aimed at boosting current low consumer price inflation risk exacerbating already strong house price inflation. The RBNZ is acutely aware of the financial stability risks stemming from strong growth in house prices, especially in Auckland. This will undoubtedly be a key focus of the RBNZ Financial Stability Report, which is due for release on Wednesday.

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