BNZ believes the Reserve Bank should keep cutting interest rates, while Finance Minister Nicola Willis says she's 'pumping cash' into the economy to create jobs

Economists at BNZ say the Reserve Bank should cut interest rates at least twice this year after the June labour market data was “unequivocally weak”.

While the headline unemployment rate rose only 0.1 points to 5.2%, other important measures showed growing slack in New Zealand’s job market. 

“A look under the bonnet reveals a picture that is at least as soft as we had feared, and one which is certainly weaker than the Reserve Bank had expected when it put together its May Monetary Policy Statement,” Doug Steel and Stephen Toplis said. 

Employment has only increased once in the past six quarters and was down 0.9% from a year ago and 1.2% from its peak in early 2023. That’s a loss of 36,000 jobs.

Workers also have less to do. Hours worked dropped 1% in June and a total of 4% over the past six quarters, to the same level as June 2022. 

“Importantly, the decline in hours worked in the quarter will be reflected in the Q2 GDP outturn. We are currently forecasting a 0.2% decline for the quarter. There is nothing in today’s data to suggest there is any upside to this prediction,” the economists said. 

A labour force participation rate in “freefall” was the only reason the unemployment rate was at 5.2%, and still appeared to be in line with the RBNZ’s forecast.

“This drop in participation is people who have either given up looking for a job, because it’s all too hard, or who have gone back to get further education.” 

Unemployment would be “substantially higher” if these people had remained in the workforce, as the central bank had assumed they would, Steel and Toplis said.

“From the central bank’s perspective, the labour market depicts an economy crying out for more support … We thus maintain our view that rates should be cut in both August and October.”

Analysis by ANZ, prior to the data release, showed financial markets expected the RBNZ to cut the Official Cash Rate twice by February 2026 — likely at the August and November meetings. 

Paul Conway, the Reserve Bank’s chief economist, said in a recent speech the Monetary Policy Committee expected to lower rates further if inflation pressures continued to ease.

‘Glass Half Empty economics’

Finance Minister Nicola Willis said the unemployment figures were lower than forecast by the Treasury both at the budget and prior to the election. 

“That is not to say we are satisfied with this rate of unemployment. We are concerned for every New Zealander that wants a job and can’t get one,” she said. 

The lower rate meant 8,000 fewer people were ‘unemployed’ than the Treasury expected, although these people may not have jobs. Many are in education or simply staying home. 

Willis acknowledged more young people were entering training and education, rather than taking jobs, but didn’t think that was necessarily a bad thing. 

“Some [commentators] have got into the habit of what I call Glass Half Empty Economics. Today, on the plain facts of the data, is a lower unemployment rate than was forecast by the Treasury and commercial banks,” she told reporters.  

“For once, let's not look the horse in the mouth and see this for what it is, which is a lower rate of unemployment than we were expecting.” 

Those who had the “incredibly tough” experience of losing their jobs shouldn’t take it personally, as it was the result of high inflation and interest rates. 

She said the Government would continue to pull whatever levers it could to create jobs.

“We are pumping cash into this economy. We have a $10 billion deficit this year which we are forecasting will increase next year. That’s because we believe it is not the right time to stop spending on health, education and police,” she said.