More official cash rate cuts could be on the cards after unemployment was reported at the highest level since 2020 today.
Stats NZ numbers showed the unemployment rate rising to 5.2% in the three months ended June, from 5.1% in the previous quarter.
That was a little less than was expected but economists said it still showed that there was significant “excess capacity” in the economy which should keep inflation in check.
ANZ economists said there was even the possibility that businesses could shed “hoarded labour” over the rest of this year.
They said there was evidence that some had been holding on to staff in anticipation of an economic recovery and that had kept unemployment about 0.5% lower than it would otherwise have been.
If the recovery didn’t happen as expected, some of those jobs could be cut.
No roadblocks for another rate cut
ANZ said the Reserve Bank was likely to put more weight on factors that indicated inflation was less likely to get too strong for its target band.
“Today’s data certainly don’t present any roadblocks to an OCR cut in August.”
ASB economists agreed the data should encourage more interest rate cuts.
“We expect a 25bp [basis points] OCR cut in August… Persistent labour market softness could see the OCR end the year below 3% as the RBNZ presses harder on the policy accelerator to try to revive the economy.”
BNZ chief economist Mike Jones said he still expected another 25bp cut this month and probably another one after that.
“The lift in the unemployment rate to 5.2% was a little less than the 5.3% the consensus had expected. But the key reason we didn’t see a larger increase was the fall in the labour force participation rate to 70.5%. And more people deciding to exit the labour force is hardly a positive signal.
“The labour market is weak and, balancing all the overs and unders in today’s numbers, we think it’s a bit weaker than the Reserve Bank’s most recent set of forecasts. This, coupled with the clear wobbles we’re seeing in broader economic indicators, points to a recovery that needs a little more help from interest rates.”
A case for stimulatory monetary policy
Kiwibank chief economist Jarrod Kerr said the data supported his long-held view that monetary policy needed to be stimulatory, not just neutral.
“The unemployment rate looks a little better than expected, but only because people, especially younger people, are leaving the workforce, unable to find work.
“The underutilisation rate is up, as hours worked are down. The fall in employment over the quarter points to a potential contraction in activity (GDP) over the quarter. That’s not good enough for an economy that should be bouncing out of the recession. The soft underbelly of the report shows the economy is struggling to recover. The RBNZ will be forced to do more than they think.”
But will that turn into home loan cuts?
Cotality chief property economist Kelvin Davidson said mortgage rates were probably at or near the bottom across many of the fixed-rate terms.
But Kerr said there could be room to move a bit.
“I think they could fall a little further, as we are getting more rate cuts offshore.”
Jones agreed.
“I think we’re probably entering the home stretch as far as the downtrend goes. But the fact the market is now more readily pricing in the downside to the OCR, along with the moves lower we’re seeing in offshore interest rates, to me suggests we could still see some further modest falls from here. I still think those declines will be more concentrated in the shorter terms though.”
rnz.co.nz
