Roger J Kerr says the real conundrum facing the Reserve Bank this week when looking at inflation forecasts is deciding when we will see wage increases feeding into higher costs

By Roger J Kerr

The Reserve Bank of New Zealand have a scheduled OCR review this Thursday 23rd March and it will be interesting to observe what points they focus their statement on in terms of global risks, the NZ economy and thus inflation trends.

They should comment on the depreciation of the New Zealand dollar from 80.0 to 76.0 on the TWI Index and that further depreciation would force them to bring forward inflation increases in 2017.

On the other hand the GDP growth towards the end of 2016 was less than expected.

In terms of capacity utilisation in the economy, I would see the situation as unchanged as the lower growth was climatic related and not really a change in the demand side of the economy.

Any inflationary pressures from increasing fuel costs have abated as crude oil runs into the ceiling caused by shale producers in the US adding to the supply at prices above US$50/barrel.

Crude oil (West Texas) prices have fallen back to below US$49/barrel. Counteracting lower fuel prices is the big jump up in food prices over recent months.

However, the real conundrum for the RBNZ in reviewing their 12 to 18 month inflation forecast is how and when increases in wages will feed into business firm’s cost structures, and thus into end-product, price-setting, behaviour?

The strong immigration inflows have not happened by accident, they are due to NZ businesses demanding skilled labour to meet their needs and they are sourcing that labour from overseas as it is not available locally.

Whilst that “demand-push” immigration trend continues, the increases in wages you would normally see at this stage of the economic growth cycle will not happen.

The RBNZ’s econometric models would have been indicating wage increases occurring by now, but it is just not happening.

A couple of businesses I am personally associated with in the financial services arena are currently advertising  for people in Sydney as they cannot source the quality/experience they require from the local labour market.

The abundant supply of labour willing to come in from overseas is continuing to keep wages increase very subdued. 

I think the wages conundrum will continue in the current vein for the RBNZ and this really clouds 2017 and 2018 inflation forecasts.

US long term interest rates (10-year US Treasury Bonds) have corrected down 10 points from 2.60% to 2.50% following the Fed’s 0.25% increase in short-term rates last week.

The interest rate markets got themselves into a frenzy ahead of the Fed meeting that the previously signalled pace of interest rate increase over the remainder of 2017 and 2018 would be shoved up.

That of course did not happen and there was some market disappointment as a result. I see the pull-back to 2.650% as temporary and continuing stronger economic data in the US will soon turn the market sentiment and direction back to increasing long term yields.

Daily swap rates

Charts loading...
Charts loading...
Charts loading...
Charts loading...
Charts loading...
Charts loading...
Charts loading...

Roger J Kerr contracts to PwC in the treasury advisory area. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


All I'm watching is to see if RBNZ tries to start fighting imaginary inflation again. They are better off dealing with current inflation and even if that means the OCR gets increased slowly then that's less harmful than their rapid increases.

"The strong immigration inflows have not happened by accident, they are due to NZ businesses demanding skilled labour to meet their needs and they are sourcing that labour from overseas as it is not available locally."
This is not entirely accurate. A large proportion of immigration is for low skilled cheaper labour, and high volumes of international students who not only supply cheap low skilled labour while studying but then are granted work visas multiple times often for low/ medium skilled jobs. This all amounts to deflationary pressure on wages.
The surges of immigration are pushed hard by govt policy, not so much from employers seeking high skilled labour.
Inflation, in the traditional sense, is dead.

Agree totally. The bit about labour not being available locally is a joke. There are a lot of New Zealand businesses that are stupid and lazy and just don't want to hire or employ graduates and train them up. They would rather bring in an immigrant with experience and pay them a pittance. There are hundreds of young Kiwis graduating every year that are passed over and ignored in favour of the Almighty Dollar.

I personally know at least a dozen graduates (aged 21 to 27ish) with degrees in civil engineering, network engineering, nursing, surveying, plumbing (jobs that NZ actually need filled) and so on that are living at home unemployed, stacking shelves at Countdown or going on OEs because they can't find any graduate positions.

The AKL petrol stn industry certainly has a scam of sorts going on.
I haven't seen a European face at a stn for a long time.

Not just petrol stations, just about every small business now.

Roger is at it again,
Only very recently,he was warning us of much higher inflation just round the corner,but oops,maybe not. And why might it not be thundering towards us? High and continuing immigration is keeping a lid on wage costs-well who would have thought of that? Another of Roger's unique insights is that the oil price is not continuing to rise. Amazingly,it seems that the shale oil producers are responding to the somewhat higher price by....increasing supply.
I find Roger's predictions useful,simply because I can almost always count on them being Wrong.

He's all over the place. But he's not alone.
The modern world, and all its complexity, really defies 20th century linear thinking.
Re: wages - the area I broadly work (engineering / architecture ) in is struggling to fill positions, I can't see anything else than wage increases to address that.
I have heard the same in financial services.
I can only assume that it is in the low wage service sector where mass immigration is keeping a lid on wages?