Reserve Bank on notice as labour costs spike

Labour cost data out today shows the job market is still tight, meaning Reserve Bank (RB) Governor Alan Bollard will likely keep a hawkish eye on interest rates for some time yet.

Statistics New Zealand's Labour Cost Index (LCI) showed private sector wages, excluding overtime, rose 0.7 per cent in the quarter, in line with market forecasts. On an annual basis, the index rose 2.9 per cent -- an historic high.

Economists said the data showed the labour market was still tight, indicating the RB would likely maintain a tightening bias but not raise interest rates again.

Annette Beacher, a senior economist at Citigroup, said the usually tame LCI had noticeably picked up steam in the past few quarters.

"As annual wages growth is still accelerating, it supports our view of the RB having a slight tightening bias while leaving the cash rate at 7.25 per cent until Q3 (third quarter) 2006," Ms Beacher said.

ANZ National Bank economist, Sean Comber, said with wage inflation still percolating at a steady clip, the RB was on notice.

"There is the balancing act that the RB is having to do with the inflation pressures and the slowing real economy," Mr Comber said.

"Ultimately we think that will be sufficient to keep them from altering the official cash rate until the end of the year."

Today's LCI showed even stronger wage increases in the public sector. Public sector wages and salaries rose 1.2 per cent in the December quarter and 4 per cent for the year to December.

Combined with the private sector data, that gave a total average increase of 0.8 per cent for the quarter and 3.1 per cent for the year.

It is a busy week for employment data, with the Quarterly Employment Survey (QES) also released today, and the Household Labour Force Survey -- tracking employment and participation rates, out tomorrow.

The QES showed average total hourly earning rose 5.4 per cent to $21.35 in the year ended December -- the biggest rise since the year to December 1990.

Total private average hourly earnings in the QES rose 0.5 per cent on the previous quarter, compared with a consensus forecast of 0.7 per cent.

Total filled jobs rose 1.2 per cent, while hours worked fell 0.2 per cent.

Bank of New Zealand senior economist, Craig Ebert, said the QES sent a mixed signal about the health of the economy, with filled jobs rising, but hours worked falling.

"We'll need to pick into the data but it's probably not going to move (the RB) one way or the other."

The New Zealand dollar was trading at US67.81c following the data, a touch softer than its US68.06c open.

- NZPA