NZ dollar drops US1c on labour cost index release

Photo / NZ Herald

The New Zealand dollar has dropped by US1c after labour data out this morning showed wage growth was a little less than expected, adding weight to the view that the Reserve Bank of NZ may move to cut its official cash rate some time this year.

By late afternoon, the Kiwi was trading at around US$74.90c, having earlier dipped as low as US74.50c, compared with US75.50c just before the data's release at 10.45am.

Bank of New Zealand currency strategist Raiko Shareef said lower than expected wage price inflation was the main reason behind the currency's fall.

"In that light, the market has moved to price in a greater chance of the Reserve Bank being forced to cut rates this year, since they have signalled that they are looking very closely at price and wage inflation," he said.

Shareef said that if wage inflation settled at lower levels, a cut in the official cash rate would become appropriate.

"We still don't think that it will happen. You would really need to see wage price inflation soften further and settle at lower levels. That's quite a high hurdle and it would take time to happen."

The labour data showed New Zealand's wage inflation slowed in the first three months of the year as an expanding labour market soaked up growing capacity, helping lift participation to a new record.

The labour cost index shows private sector wages rose 0.3 per cent in the first quarter, slowing from a 0.5 per cent pace in December, according to Statistics New Zealand.

That's the slowest pace since the March 2014 quarter. Annual wage inflation for the private sector was unchanged at 1.8 per cent.

Including the public sector, total labour costs rose 0.3 per cent in the quarter, slowing from 0.5 per cent three months earlier, for an annual increase at 1.7 per cent.

The Reserve Bank last week said it was monitoring wage and price-setting outcomes after consumer price inflation fell short of its expectations, prompting governor Graeme Wheeler to adopt a bias towards lowering interest rates. The New Zealand dollar dropped to 74.91 US cents after today's data, from 75.54 cents immediately before as traders speculated weak wage pressures would add to the case for an interest rate cut. The trade-weighted index declined to 77.51 from 78.02.

Just 11 per cent of all salary and ordinary time wage rates increased in the quarter, the lowest proportion since March 2010 in what's typically a muted period for pay rises. On an annual basis, 59 per cent of salaries were hiked, unchanged from the December period.

The quarterly employment survey showed ordinary private sector wages rose 0.2 per cent to an hourly rate of $26.83, the slowest quarterly growth since the December 2012 period. Including the public sector, ordinary time wage growth was flat at $28.77.

New Zealand's unemployment rate was unchanged at a revised 5.8 per cent, higher than the expected 5.5 per cent rate forecast in a Reuters survey of economists. The number of people employed rose 0.7 per cent in the quarter, while the participation rate increased 0.2 of a percentage point to 69.6 per cent, a new record.

"This is a greatest share of New Zealanders we have ever seen in the labour force," labour market and households statistics manager Diane Ramsay said in a statement. "We saw strong employment growth over the last year, with Auckland and Canterbury making the most significant contributions."

New Zealand's population has been bolstered by an increased inflow of net migration, with fewer kiwis leaving, more expats returning, and new migrants arriving. That flood of new labour has helped keep wage inflation tame as more people compete for jobs, while the accelerating economy has been able to soak up new workers.

Today's household labour force survey showed manufacturing jobs rose to 256,800 in the quarter from 253,200 in the December period, construction jobs grew to 212,700 from 204,500, and retail, accommodation and hospitality jobs rose to 371,800 from 359,000.

Total hours work rose a seasonally adjusted 1.4 per cent to 78.7 million in an average week, for an annual rise of 2.7 per cent.

Auckland led jobs growth in the quarter, though an increased workforce lifted its unemployment rate to 6.9 per cent from 5.8 per cent in December, while Canterbury's jobless rate fell to 3.2 per cent from 3.5 per cent. Northland had the highest unemployment rate across the country at 9.9 per cent, up from 8.3 per cent in the December quarter.

See the full employment stats release here: