Only one remaining thing might yet prompt the Reserve Bank (RBNZ) to raise the Official Cash Rate (OCR) next month - and that would be any nasty surprise with labour market figures.
Statistics NZ is set to release the full suite of labour market figures on Wednesday, November 1. The key numbers to look for are the unemployment figure and the wage rise figures.
As per its most recent set of forecasts, in the August Monetary Policy Statement, the RBNZ is forecasting unemployment of 3.8% as at the September quarter. Stats NZ produces a number of measures of wage increases. For simplicity's sake I like to follow the private sector average hourly earnings. The RBNZ's forecasting annual growth of 7.1% in this figure.
Why do labour market figures matter?
In the context of 2023 New Zealand they are very important because the very tight labour market we've had - amplified by the border closures during the pandemic - has been a key contributor to inflation. The RBNZ needs to see 'slack' coming into the labour market to help ease inflationary pressures and to help it get inflation back inside its targeted 1% to 3% range. Inflation has been outside that range since the middle of 2021.
But with the borders now open wide, the labour market situation is cooling.
Migrant workers have been pouring into the country this year. Ministry of Business Innovation and Employment figures show nearly 200,000 people entered NZ on work visas in the 12 months to September.
And for sure, these workers are soaking up vast numbers of jobs. But the interesting thing is, the more jobs are filled, the more it looks like our official figures were actually under-estimating just how tight the market was.
Our unemployment rate bottomed out at 3.2% in early 2022. As tight as that figure made our labour market look - in reality it seems even that figure understated things.
Stats NZ's latest available employment indicator figures show that even though the labour market is demonstrably cooling, in August more than 5700 additional jobs were filled. It now seems pretty clear that significant numbers of employers simply gave up trying to fill some jobs during the time the border was closed.
What this all means is that additional jobs are still being filled, even as the unemployment rate starts to rise. But the unemployment rate has started to rise only slowly and much more slowly than was earlier picked by economists and the RBNZ - probably because of the aforementioned understatement of just how tight the labour market has been.
Unemployment hovered around between 3.2% and 3.4% from September quarter 2021 till and including March quarter 2023. Finally it shifted up to 3.6% in June.
The annual rise in private sector average hourly wages was 7.7% in June 2023, down from a peak annual rise of 8.6% as of September 2022.
So, remember, the RBNZ's looking for 3.8% unemployment as of the September quarter 2023 and and annual private sector average hourly increases of 7.1%.
Achievable? It looks that way.
The major bank economists seem to be leaning pretty much the same way as the RBNZ is thinking. I had previews from economists at Westpac, ANZ and ASB in front of me at time of writing this. The economists were pretty much in concurrence with the RBNZ pick on wage inflation.
As far as the unemployment number, they all picked 3.9%, which of course is actually slightly higher than the RBNZ's picking.
If the labour market figures do turn out to be somewhat in line with the RBNZ's forecast then it is to be imagined that the central bank will keep the OCR 'on-hold' at 5.50% when it has its last review for the year on November 29.
An 'on-hold' decision has appeared near-certain since the September quarter annual inflation figure came in at 5.6%, below most economists' forecasts and under the 6.0% the RBNZ had forecast.
As said at the top of this article, the only thing that might, and it's a fairly big might, force the RBNZ to change its mind and hike the OCR again in November is if there's a big shock in those labour market figures - either the unemployment figure actually goes down, or maybe the rate of wage growth actually increases.
Either, or particularly both, of those outcomes would give the RBNZ a serious headache. After the November review it is three whole months till the next one and the RBNZ would not want a summer break during which it is not feeling in control of matters.
Notwithstanding all that though, I think the RBNZ would currently have a 'high bar' as the economists like to style it, to changing the on-hold stance it has held since May of this year.
Given that inflation, which, of course, is the big goal here, is at this point tracking in the right direction, the RBNZ may want to 'look through' any adverse surprises in the labour market figures.
It is worth bearing in mind though, that as per its August 2023 forecasts, the RBNZ was expecting both a big decline in inflation and a big rise in unemployment in the fourth quarter of the year that we are now in.
It forecast annual inflation to fall to 5.2%. As we know, it has already had a positive surprise, with inflation coming in at 5.6% as of September.
However, the unemployment forecast may yet prove more problematic - with the RBNZ expecting a big rise from its forecast 3.8% as of September to 4.4% in December.
It is worth mentioning this, because if the unemployment figure comes in lower than 3.8% for the September quarter then this would put a lot of pressure on that forecast for the December quarter. The RBNZ would be getting behind the eight ball.
Alternatively, if the figure comes in higher than 3.8% then it makes the December forecast look that much more realistic and achievable.
So, in the end, the labour market figures being released in the coming week are probably unlikely to change the RBNZ's mind on the OCR for now, but may have significant ramifications for the RBNZ's early thinking ahead of its first OCR review of 2024 on February 28.
For the RBNZ the unemployment figure really needs to show a continued weakening in the labour market. As long as it does then the chances remain fairly good that we have seen the last of the OCR hikes, and therefore next year will become a story of when we can expect to see interest rates come down.
But, let's face it, with the global political and economic situation looking anything but stable, there could be plenty of bumps in the road yet.
*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.
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