By Alex Tarrant
Considerably weaker-than-expected employment figures in the June quarter were the "final nail in the coffin" for ASB economists, who pushed out their pick for the next hike in the Official Cash Rate from March to June 2013.
Weakness in employment growth, the high New Zealand dollar, contained wage pressures and uncertainty about the European recession all skewed the risks to a mid-2013 start to rate hikes from the OCR's current record low 2.5%.
ASB's economists now join Westpac, Infometrics and ANZ economists in picking a mid-year 25 basis point hike as the OCR's next move. The New Zealand Institute of Economic Research is picking a resumption of rate hikes in 2014, although says there is also a chance of a cut between now and then.
BNZ economists were still picking a March hike in their OCR commentary on July 26, and have said risks pointed to a later start. In its August 6 morning fixed interest commentary BNZ said it was picking the first hike in the first half of 2013.
Following the unemployment figures, BNZ economists hinted at changing their pick to saying June, but preferred to "buy a bit more time on the matter." They stuck with March due to other trends showing economic momentum and inflation risks remained in the pipeline.
The Reserve Bank itself has forecast 90-day bank bill rates would rise from mid 2013, suggesting a 25 basis point OCR hike from its June 13 meeting next year. Financial markets are forecasting the OCR will rise around 10 basis points over the next year.
Lower for longer
ASB: June 2013
"We have pushed out our view of when we see the RBNZ first lifting the OCR to June 2013 from March 2013," ASB economist Jane Turner said in the bank's reaction to today's unemployment data.
"For the RBNZ to hike, future inflation concerns need to outweigh the ongoing risks posed by Europe’s never-ending crisis. The weakness in overall employment growth and continued elevation of unemployment rate will reinforce that wage pressures will remain contained in the near future," Turner said.
"Moreover, uncertainty over the extent of Europe’s recession and the NZD’s resilience have been skewing the risks to a later start than March," she said.
However, ASB economists still thought the Reserve Bank was under-estimating future inflation pressures and the risks of the housing market heating up by more than it currently anticipated.
"The risks around a June start seem balanced – an earlier start is conceivable if the global environment calms, housing heats up further and construction rises sharply. We still expect the pace of OCR increases to be spaced out 3-monthly at each Monetary Policy Statement to an eventual peak of 4%," Turner said.
ANZ: Mid-2013 at the earliest
In its reaction to the Reserve Bank's July 26 OCR review, ANZ chief economist Cameron Bagrie said the hurdle for future hikes in the rate remained high.
"Developments in Europe remain at the core of the RBNZ’s thinking, with the RBNZ noting that the trading partner outlook remains poor. While a significant deterioration in the global outlook would strengthen the case for OCR cuts, the inference from the RBNZ is that the risk of this remains limited," Bagrie said on July 26.
"The bottom line: the OCR looks set to stay at 2.5 percent for an extended period, bar a global meltdown. We do not foresee any need for the OCR to move up before the middle of 2013 at the earliest," he said.
In their reaction note on the unemployment figures later on Thursday, ANZ economists said that despite the softer figures, there was little in them to threaten the Reserve Bank's 'wait and see' stance.
Westpac: July 2013
Westpac economists said on Thursday following the unemployment figures that the "genuinely weak labour market report" would serve as further confirmation the economy was operating well below its capacity.
"The Reserve Bank will feel even more comfortable with its plan to leave the OCR at its current, stimulatory level for a long while. We continue to expect no change in the OCR until July 2013," Westpac economists said.
BNZ: Still March 2013, but leaning to June
Meanwhile, BNZ economists said on July 26 they were sticking with their March pick. They had pointed to risks of a later start, and this week BNZ's fixed interest commentary said they were picking a resumption in rate hikes in the first half of 2013.
In reaction to the unemployment figures, they said they could "see the RBNZ simply leaning towards further delay of the OCR hikes it forecasts."
"This does call into question the March point we’re picking for the first cash rate increase (as part of a very gradual uplift over the next 2-3 years). Might June be a better focal point? Today’s labour market trends certainly argue so," BNZ economists said.
"However, given their backward looking nature, and with much else to suggest NZ economic momentum, and inflation risk, remains in the pipeline, we prefer to buy a bit more time on the matter."
JP Morgan: March 2013, but risk of being later
JP Morgan Australia economist Ben Jarman said Thursday's employment numbers further removed the need for the Reserve Bank "to be at all front-footed with the normalisation of policy."
"The risks remain that the RBNZ is on hold until deeper in 2013 than our forecast assumes (a 25bp hike in March)," he said.
(Updates with BNZ, ANZ unemployment reactions, JP Morgan Australia comment)
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