Softer labour market data won’t be enough to make the RBNZ cut the OCR before late 2024 or 2025, bank economists say

The labour market is weakening a little faster than expected but bank economists don’t think the pace of unemployment will change the Reserve Bank’s mind when it comes to its plan on when to cut interest rates.

Statistics NZ announced on Wednesday morning that the unemployment rate had risen from 4% in the December quarter to 4.3% in March – higher than the 4.2% the RBNZ had anticipated. 

BNZ’s head of research Stephen Toplis said while this was “relatively insignificant” BNZ thought the deviation was a “sign of things to come”. 

“This will keep the pressure on the RBNZ to ease a little sooner than the second quarter 2025 its February Monetary Policy Statement intimates,” he said.

Unemployment is now well above the lows of 3.2% in the December 2021 and March 2022 quarters. 

Back then, the low unemployment numbers had been helped by restricted borders limiting increases to labour supply while labour demand was still running high.

Stats NZ said the underutilisation rate for the March 2024 quarter – which includes people who want more work hours despite having a job – went up from 10.4% to 11.2% in the quarter, and from 9.1% in the March year.

Unemployment rose by 31,000 to 134,000 people, while total underutilisation rose 75,000 to 355,000 people.

Toplis said that the government’s job cuts in the public sector aren't likely to show up in the labour market data for a while yet.

“We think the ‘re-sizing’ won’t really show up properly until we see the second quarter and third quarter data,” he said.

RNZ, which is keeping a public sector job cut tally, has the current number of job losses in the sector at 3,474. 

Kiwibank senior economist Mary Jo Vergara said the NZ economy had been through a “significant recession” and four of the last five quarters had recorded a labour contraction.

“The labour market lags the economy by about nine-to-12 months. So there's still another year of softness ahead,” she said.

In the March year, the working age population increased by 129,000 to 4.3 million while the number of people employed rose 36,000 to 2.9 million.

The total employment rate was 68.4% in the March quarter. That’s down from 69% in the December quarter and down from 69.7% in March 2023. The employment rate last peaked at 69.8% in June 2023.

Vergara pointed out that the weakening labor market served as further confirmation monetary policy was working like the RBNZ wanted it to.

“Labour demand is softening. The stickiness in domestic inflation requires rates to remain restrictive for some time yet,” she said.

“However, we still expect the RBNZ to begin the rate cutting cycle earlier than their current track suggests. We have still pencilled in November as the earliest kick-off date.”

Kiwibank expects the unemployment rate to lift to 5.3% by the end of 2024.

ASB senior economist Mark Smith said ASB also anticipates the rate of unemployment will continue to reach over 5% by year-end as well and peaking at around 5.5% by midway next year.

“Nonetheless, the RBNZ will be wary of the risk that inflation does not settle below 3%, with the Official Cash Rate unlikely to be moved lower until 2025,” he said. The OCR's currently at 5.5%.

ANZ economists Henry Russell and Miles Workman said Wednesday’s data was on the softer side of expectations but not enough to “shift the dial” for the RBNZ. 

“All in all, the labour market is going the way the RBNZ require it to, but there is still lingering uncertainty around the magnitude and pace of loosening going forward,” they said.

Wage growth

Even though the unemployment rate skipped up 4% to 4.3% in the March quarter, wage growth might not be slowing down enough to keep the central bank satisfied.

Westpac senior economist Michael Gordon said a “meaningful slowdown” in wage growth could be expected over the rest of the year.

“What remains to be seen is whether this will go far enough to be consistent with the 2% inflation rate that the Reserve Bank is ultimately aiming for,” he said.

The labour cost index which measures how much a typical job costs for employers increased 4.1% in the year to March, compared to 4.3% in the December quarter.

Meanwhile, average hourly earnings rose 5.2% to reach $40.96 – an annual increase of $2.03 - and average weekly earnings increased 5.8% to $1,593. 

Annual private sector wages were up 3.8% in March and in the public sector they were up 5.6%.

Wage growth in both sectors remains significantly lower compared to the December quarter, when private sector wages rose by 6.6% and public sector wages by 7.4%.

Kiwibank expects the weakening in wages growth to continue with Vergara adding that “everything washes out in wage growth”.

“The report showed a large 66% of workers receiving pay rises. But fewer were seeing pay rises above 5%. More and more had to accept pay rises between 2%-to-5%. That's the first sign of softening employer demand,” she said.