Unemployment jump puts pressure on RBNZ

Reserve Bank governor Alan Bollard will next announce on September 16 if he will keep hiking official interest rates. Photo / Mark Mitchell

A surprisingly large rise in the unemployment rate in the June quarter is putting pressure of the Reserve Bank of New Zealand (RBNZ) to stop hiking interest rates.

Many economists believe the central bank will hike up the official cash rate - now at 3 per cent - once more at its next policy review on September 16, then pause.

Some question that scenario and predict the monetary policy tightening from historic lows begun in June is now on hold.

The New Zealand unemployment rate rose to 6.8 per cent in the June quarter, reversing most of a sharp fall in the March quarter, according to the Household Labour Force Survey published today by Statistics New Zealand.

The New Zealand dollar fell immediately to US72.75c from US73.52c but consolidated at lower levels.

The 6.8 per cent unemployment rate was significantly higher than economists predicted and resulted from the number of unemployed people growing at a faster rate than the labour force.

In May, Statistics NZ stunned financial markets by reporting the March quarter unemployment rate fell 1.1 percentage points to 6 per cent. It was the first fall in the rate since the December 2007 quarter, and the largest fall since the survey began in March 1986.

"This rise in unemployment follows an unseasonal drop recorded in the March 2010 quarter and indicates a period of volatility in the labour market," Statistics NZ said today.

The RBNZ was expecting a steady unemployment rate of 6 per cent, but economists said it should now pause for thought.

"We believe the Reserve Bank should now be pausing. The domestic economic recovery is lacklustre and commodity price support is waning," said Goldman Sach JBWere economist Philip Borkin.

Westpac senior currency strategist Imre Spezier said the headline grabbing number raised questions about the quality of the survey and caused people to question if the Reserve Bank will hike, but the detail in the survey was positive.

"It has increased the chances of a pause next month but we still think they will go," he said.

To go in two quarters from an unemployment rate of 7.1 per cent to one of 6.8 per cent was more in line with history and consistent with other data on the economy, said Speizer.

Borkin said the headline unemployment number likely overstated the weakness in the labour market.

"The fall in employment was entirely driven by a 1.6 per cent quarter-on-quarter fall in part-timers. Full-time employment rose 0.2 per cent," he said.

Hours worked rose 0.6 per cent, suggesting that firms are looking to utilise more labour resources. The participation rate was unchanged 68 per cent.

Borkin sees a 60 per cent chance of a pause at the next review, and expects the official cash rate to stay at 3 per cent for the rest of 2010.

ASB economist Jane Turner still expected a rate increase in September, followed by a pause in October and December and was predicting a cycle peak of a 4.5 per cent, down from 5 per cent previously.

- NZPA