Boom in jobs a test for Bollard

Fresh evidence of an ever-tighter labour market will test the Reserve Bank's confidence that the interest rate rises last year are enough to slow the economy and relieve inflation pressures, economists say.

However, most expect governor Alan Bollard to keep his nerve and leave rates on hold.

The money markets were less sanguine with pricing now implying a 50-50 chance of a rise by April, said ANZ National chief economist John McDermott.

The household labour force survey for the December quarter recorded a 1.6 per cent jump in employment, the highest since the series began in March 1986. It pushed annual employment growth to 4.4 per cent.

The demand for labour was largely met by a jump in labour force participation to a record 67.7 per cent rather than growth in the working age population.

The net inflow of permanent and long-term migrants added just 3657 people in the December quarter, compared with an average of 6100 over the past 3 1/2 years.

Deutsche Bank Ulf Schoefisch partially discounted the surge in employment by saying most was in part-time jobs - and jumps in part-time work were usually partly reversed in the following quarter.

Also, most of the increase was in the services sectors which tended to be volatile.

He pointed to the 0.5 per cent increase in full-time employment as more indicative of underlying jobs growth.

Schoefisch said the Reserve Bank would be wary about raising rates.

"It would catapult the dollar higher if they started again, so the hurdle is quite high."

But Bank of New Zealand economist Tony Alexander thought there was a 75 per cent chance that the official cash rate would be raised next month.

He said growth in the number of people employed and hours worked accounted for the vast majority of the increase in economic output last year, leaving perhaps only a 0.7 per cent increase in productivity - well below the average of about 1.3 per cent in recent years.

"It's got to be about the last bit of economic growth that can be easily obtained by piling on more resources. From here on, unless there is a jump in productivity or a sharp drop in demand, it is a highly inflationary environment."

McDermott said the Reserve Bank's forecasts already allowed for a tight labour market and a temporary rebound in housing market activity as a result of the mortgage price war late last year.

But the price war was over and, as fixed-term loans expired, mortgage borrowers would feel more of the effect of last year's rate increases.

Also, exporters' foreign-exchange hedging at more comfortable rates was rolling off, exposing more to the high dollar.

There was uncertainty about the links between employment and wages and between wages and consumer prices. McDermott expected the bank to keep interest rates on hold through 2005.