Decisions, decisions

The latest labour market data highlighted that the New Zealand economy is continuing to grow at a solid pace. But at the same time, they showed that inflation remains low and that we still have lingering spare capacity.

It’s a combination of conditions that has left the RBNZ between a rock and a hard place. While the risks of OCR cuts have increased, we remain sceptical that the RBNZ will pull the trigger due to the continued strength in the domestic economy.

Developments over the past week, particularly the March quarter employment report, have highlighted the two key challenges that the RBNZ is currently weighing up. First is the weakness in inflation. Even looking through the recent oil related drop in prices, inflation has been lingering below the mid-point of the RBNZ’s target band for three years now. And the longer it remains low, the greater the risk that we see a sustained and material downshift in domestic inflation expectations and pricing behaviour. As emphasised in their recent communications, this risk is clearly front of brain for the RBNZ as it would make it harder for them to achieve their medium-term inflation target. Consequently, the weak March quarter wage data will have been an unwelcome surprise. Wage inflation based on the private sector LCI was just 1.8% in the year to March - lower than market expectations and the RBNZ’s last published forecasts. In fact, despite strengthening economic growth, we haven’t seen any material lift in nominal wage growth since the 2008/09 recession.

On top of this, we’ve seen signs of lingering spare capacity in the economy, which is pouring cold water on the possibility of a near-term pick-up in domestic inflation. In March the unemployment rate was 5.8% - unchanged from December’s upwardly revised level. Behind this result has been strong growth in the size of the labour force. Continued improvements in the labour market have encouraged more people to enter the labour force from both on- and off-shore. This has resulted in the labour force growing by a massive 73,000 people over the past year, and has pushed the participation rate to a record high of 69.6%.

Share: Analysis feed

All information contained on this website is given in good faith and has been derived from sources believed to be accurate. However, the information is selective and neither Westpac nor any other company in the Westpac Group have verified the information, which may not be complete or accurate for your purposes. Those companies make no representation or warranty of any kind as to the accuracy or completeness of the information. It is general information only and should not be considered as a comprehensive statement on any matter and should not be relied upon as such. Neither Westpac nor any other company in the Westpac Group nor any of their directors, employees and associates guarantees the security of this website, gives any warranty of reliability or accuracy nor accepts any responsibility arising in any other way including by reason of negligence for, errors in, or omissions from, the information on this website and does not accept any liability for any loss or damage, however caused, as a result of any person relying on any information on the website or being unable to access this website. This disclaimer is subject to any applicable contrary provisions of the Australian Securities and Investments Commission Act and Trade Practices Act.