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Reserve Bank governor Alan Bollard said over the weekend the domestic economy was still fragile and the RBNZ remained comfortable with its view that it would keep the Official Cash Rate on hold until the middle or latter part of 2010.

Speaking to Guyon Espiner on TVNZ’s Sunday Q&A, Bollard also said the housing market was “looking slightly spongy” at the moment, despite previous fears of house prices going back into a boom. Bollard also reiterated his support for reform on property taxation.

The interview followed figures last week showing New Zealand’s unemployment rate jumped to 7.3% in the December quarter from 6.5% in September. The RBNZ had been forecasting a 6.6% unemployment rate for December, although Bollard said he did not think this meant the economy was in a lot worse shape than predicted:
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Bernard Hickey delivers an economic weather report in association with the BNZ on surprisingly weak labour force figures that showed the unemployment rate rose to 7.3% from 6.5%. This was much higher than the 6.8% economists had expected and higher than 6.6% the Reserve Bank had expected.

Economists pointed out however that a large reason for the rise was the rise in the workforce and a slight rise in the participation rate. Employment also fell, but only by 0.1% and in line with expectations.

Economists also said the results reinforced expectations that the Reserve Bank would be able to hold the Official Cash Rate at a record low 2.5% until the middle of 2010. Wholesale interest rates fell slightly after the surprise result and the New Zealand dollar fell. But fixed mortgage rates and term deposit rates are unlikely to fall in tandem, given banks face higher costs to gather term deposits and funds on international money markets.
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New Zealand’s unemployment rate rose to a seasonally adjusted 7.3% in the December quarter from 6.5% in September, as more people entered the job market but could not find work, Statistics New Zealand said.

(Update 1 includes Stats NZ release, Update 2 includes labour force participation rate, Update 3 follows currency movement, Update 4 includes ASB economist reaction. Update 5 includes BNZ economist reaction.)

Economists said the result was worse than the Reserve Bank expected and meant the central bank would remain comfortable with its outlook of a steady Official Cash Rate (OCR) at 2.5% until mid-2010. Wholesale interest rates and the New Zealand fell slightly as financial markets nudged their expectations of the OCR down a bit.

Retail mortgage and deposit rates, however, are unlikely to fall as banks face higher funding costs and capital requirements in coming years. Bank net interest margins have fallen more than 20 basis points in the last year as they are forced to raise term deposit rates to encourage deposits from local savers and to pay higher rates for international wholesale funds.

Economist expectations had centred around the unemployment rate rising to 6.8% during the quarter. The New Zealand dollar initially fell from 70.8 USc to 70.1 USc on the news and had fallen to around 69.9 USc by 11:30am.

ASB economist Chris Tennent-Brown said the headline unemployment figure was higher than economist expectations because more people chose to enter the workforce than was expected at this stage of the economic recovery. Tennent-Brown said the figures would continue to make the Reserve Bank comfortable with its view that it can keep the Official Cash Rate on hold at 2.5% until the middle of 2010 (see full comments below).

BNZ economist Stephen Toplis said the figures showed some slack in the market that meant the Reserve Bank could be relaxed about its current monetary policy outlook. (See fuller comments)

Seasonally adjusted figures show an extra 16,000 people joined the labour force during the December quarter (up 0.7%), while the number of unemployed rose by 18,000 to 168,000 people. This was the highest number of unemployed people since the June 1993 quarter, Stats NZ said.

The 7.3% unemployment rate is the highest level since the June 1999 quarter and up from 4.7% in December 2008 and 3.5% in December 2007. The number of employed people fell by 2,000 to 2,152,000.

The labour force is made up of those in work (employed) and those not in work but searching for it (unemployed). The number of working age people out of the labour force altogether rose by 4,000 (0.3%) to 1,086,000. The labour force participation rate rose 0.1% to 68.1% of the total working age population in the December quarter from September.

Here is the release from Stats NZ:
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Prices, as measured by the Consumers Price Index (CPI), fell 0.2% in the December quarter from September, figures released by Statistics New Zealand show. The drop was in line with the Reserve Bank of New Zealand’s forecast and is likely to reinforce the central bank’s view that it can keep the Official Cash Rate on hold at 2.5% until ‘around the middle’ of 2010.

(Update 1 includes Stats NZ comments. Update 2 includes further Stats NZ comments on trimmed mean measures showing underlying price change “quite flat” over December quarter. Update 3 adds economist comments. Update 4 tracks NZ$.)

Economist predictions had centred around a flat CPI during the December quarter, and ranged from of a 0.3% fall to a 0.3% rise. Stats NZ said its trimmed mean measures, which exclude extreme price increases and decreases, recorded quarterly movements ranging from no change to 0.1%. “This indicates that underlying price change for the quarter was quite flat,” Stats NZ said.

The CPI rose 1.3% in the September quarter, 0.6% in June and 0.3% in March. The New Zealand dollar initially fell by around 0.4 USc on the news to 73.5 US cents. Just after midday, the NZ dollar had fallen almost 0.75 USc to 73.25 USc.
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ASB and subsidiaries Bank Direct and Sovereign have hiked one to three year mortgage rates by between 10 and 30 basis points (bps) in the first mortgage rate move by a major bank in 2010. The new rates are now the highest offered for their respective terms by a bank in New Zealand.

ASB raised its one year mortgage rate by 30 bps to 6.55%; its 18 month rate by 30 bps to 7.05%; two year by 30 bps to 7.55%; and three year by 10 bps to 8.1%. See and compare all mortgage rates offered in New Zealand here. One basis point is 0.01%.

Bank Direct made the same changes, and offers the same rates as ASB for those terms. Sovereign’s rates are 15 bps above ASB’s rates.

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The Reserve Bank of New Zealand’s monetary policy, or its ability to control consumer spending and inflation through hikes or cuts in the Official Cash Rate (OCR), gained more potency throughout 2009 as the proportion of home loan borrowers on floating mortgage rates hit its highest level in almost five years.

Figures released by the Reserve Bank (RBNZ) show the proportion of home loan borrowers on floating mortgages reached 24.4% in November 2009, its highest level since February 2005, and up from a low of 12.5% in August 2007.

The Official Cash Rate’s biggest influence is on short term interest rates in New Zealand, meaning a hike or cut in the OCR quickly flows through to variable and shorter term fixed interest rates. A borrower on a floating mortgage rate would generally be hit by a 25 basis point (0.25%) hike in the OCR with the same increase to their floating rate.

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