The Reserve Bank is now set fair to 'watch, worry and wait' its way through the election

The Reserve Bank (RBNZ) now seems set fair to do what I believe has been its unstated wish - to keep the Official Cash Rate (OCR) on hold at least till after the October 14 election and avoid being caught up in political games.

For the RBNZ then, it will most definitely be in the oft-quoted words of the central bank's officials, 'watch, worry and wait' time.

The labour market figures released on Wednesday were a case of 'some good, some not-so-good' for the RBNZ.

There's a number of wage increase measures in the suite of labour market figures - some of these came in under what the RBNZ picked. However, the figure I follow, the private sector annual increase in hourly wages came in a little hotter than the RBNZ picked - the actual figure was 7.7% versus the RBNZ pick of 7.6%.

Employment growth came in way hotter than the RBNZ - and others - picked at 1.0% for the June quarter versus the RBNZ's pick of 0.6%.

But unemployment rose to 3.6% from 3.4% and that was higher than the RBNZ's (and market average) pick of 3.5%.

Following on from the June quarter Consumers Price Index annual rate of inflation of 6.0% (versus an RBNZ pick of 6.1%) this means the most recent key economic data are sufficiently in line with what the RBNZ thought the situation was back in May. It was in May that the central bank decided to raise the OCR by another 25 points to 5.5% - but also to signal that it was now pushing the 'pause' button on any more hikes.

It was a bold call that could have blown up in the RBNZ's face if the subsequent economic data had gone against it.

As it was the CPI June quarter data produced domestically-generated inflation (annual rate 6.6% versus RBNZ pick of 6.3%) that was still worryingly hot. And that super-strong (+1.0%) employment number in the June quarter, along with still-hot wage inflation will not be giving great comfort.

There's nothing in the data at this stage though that goes against the RBNZ's forward scenario of continuing cooling inflation (it's picking 5.7% annual 'headline' inflation for the September quarter) and a fairly rapid rise in jobless numbers (unemployment picked to be 4.1% for the September quarter).

The RBNZ's next OCR review is on Wednesday, August 16. The only potential obstacle remaining in the road between now and then is the RBNZ's own Survey of Expectations, which comes out on August 9. This is where forecasters and business leaders give their view of where inflation will be in future, with the most watched figure being for two years ahead. The important thing about this survey is not whether the picks about the level of future inflation are right or not (they won't be, they never are). The key thing is the survey acts, in effect, as a market view of whether the RBNZ is on top of inflation or not.

So, to cut a long story short, the RBNZ will be looking for this survey to show a reduction in the expected future rate of inflation. And I think it will, though not necessarily by as much as maybe the RBNZ would hope given how 'sticky' that domestic inflation is looking. 

But assuming there's no real nasties in that survey then the RBNZ has a clear path to 'do nothing' again at the OCR review a week later. The August 16 OCR review is accompanied by the full Monetary Policy Statement, so we'll be getting a series of updated forecasts from the RBNZ - including its forecast of the future level of the OCR, which as ever will be intensely scrutinised.

Then the next OCR review is on October 4 - a week and a half from the election. We can most definitely put the 'do nothing' tag on that right now, I think. Aside from the fact that it would be inviting all kinds of trouble to hike interest rates when our political great and good are in full election panic mode, there actually will be no reason to do so anyway. 

There's only one key economic release remaining now before the election and that's the June quarter GDP figures on September 21. You might recall that by virtue of the March quarter GDP figure coming in just negative, at -0.1%, we 'officially' went into recession through recording two consecutive quarters of GDP shrinkage.

The only way the June quarter GDP figures could even mildly perturb the RBNZ would be if they came out unexpectedly hot, which nobody thinks they will. In any case the GDP figures are always pretty much old news when they come out. The politicians will likely get very excited of course if the GDP figure is another negative one, but that's about as far as it might go. 

For the record, I'm still confidently expecting that we'll see an upward revision in the March quarter figure and we won't actually be in recession at all! How will opposition MPs hide their disappointment! Watch this space. 

All of which means the RBNZ should be able to do its watch, worry and wait - emphasis on the 'wait' - right through the election period.

And after the election?

Yeah, well interesting. The next CPI release for the September quarter comes out on October 17 - just three days after the election. The next labour market figures come out on November 1.

Remember, the RBNZ is looking for a further slight fall in inflation - and a very sizeable rise in unemployment. 

If either or both of those economic data releases do throw up nasty surprises, then the final OCR review of the year on November 29 would become very much 'live'.

It has to be said that based on the heat still visible in the labour market from the June quarter figures, it's the September quarter labour market figures that could be most likely to throw the proverbial spanner in the works. The RBNZ is expecting a very rapid cooling in the labour market and very fast rise in unemployment. 

Look, the RBNZ might be right. The big wave of imported labour we've seen come into the country so far this year has clearly had a big impact in terms of the rapid filling of jobs - with presumably many of these jobs not able to be filled while the borders were shut. 

The RBNZ is, I think, counting on that process of job vacancy filling now being just about complete - and that there will be a rapid cooling of labour market conditions from here. 

Whether the central bank is right or not will be a key determinant of whether it can remain in 'watch, worry and wait' mode over the three month summer break, or whether it may yet need to give us an unwanted early Christmas present - another OCR hike.

*This article was first published in our email for paying subscribers. See here for more details and how to subscribe.