Job market softness, slowing wage growth, and anchored inflation set the stage for an RBNZ cut
Kiwibank economists say a combination of weak labour market data, subdued inflation expectations and slowing wage growth has set the stage for a 25bps cut to the official cash rate (OCR) at next week’s Reserve Bank monetary policy statement – with an eventual move to 2.5% likely.
Labour market weakness in focus
“Since the RBNZ paused in July there were three key data releases we knew would be carefully picked apart before the August meeting,” said Kiwibank’s Jarrod Kerr, Mary Jo Vergara, and Sabrina Delgado (pictured left to right), in a Kiwibank commentary.
The June quarter inflation report showed weak underlying price pressures despite a lift in the headline rate to 2.7%. Last week, the remaining two key data points – the Kiwi labour market report and the RBNZ’s survey of inflation expectations – both supported the case for further rate cuts.
“At first glance, the June jobs report looked a bit better than expected. But under the microscope, the Kiwi labour market is clearly soft,” the Kiwibank economists said.
The unemployment rate came in at 5.2%, slightly below forecast, but the labour force participation rate fell to a four-year low of 70.5%.
“That, in itself, is a sign of a weak labour market… the labour force shrank over the year… the deepest since March 2013,” the economists said.
Westpac also noted that the 5.2% jobless rate now matches its COVID-era peak and is the highest since 2016. While this weakness was in line with RBNZ forecasts, it highlights that both the unemployment and underutilisation rates are near post-COVID highs – signalling significant spare capacity. They added that falling participation is a normal cyclical adjustment, with teen workers showing the biggest swings in and out of the labour force.
Employment fell 0.1% in the June quarter, while hours worked dropped 1% – the sixth straight quarterly decline – adding to concerns about GDP. Wage growth has also slowed, with the private sector Labour Cost Index up just 2.3% over the year, the lowest in four years.
According to Westpac, the slowdown in wage growth to 2.2% annually places it in a “Goldilocks” zone – well below the inflationary peaks but above the ultra-low rates seen through much of the 2010s. This, combined with weak hiring momentum and job ads still below pre-Covid levels, suggests the labour market will lag behind the broader economic recovery.
Inflation expectations anchored
The Kiwibank economists noted that alongside “contained and anchored inflation expectations… the door remains open for a 25bps rate cut later this month. And the cash rate will need to go to 2.5%, eventually.”
ASB said inflation expectations remain within a 2-2.5% range, which “will not be causing many sleepless nights for the RBNZ.” The bank now expects the OCR to fall below 3% by year-end, with risks tilted towards more aggressive easing given the scale of spare capacity in the economy.
Market pricing fully expecting a cut
“In the short end, there are now 50bps of cuts priced and a terminal of around 2.75%,” said Matthew Crowder, Kiwibank balance sheet manager of treasury. “A rate cut in August is almost fully priced, but a follow up in October is still seen as unlikely.
“With all the major data now released, the next steer will be from the RBNZ itself next week with a full suite of updated forecasts and OCR track.”
Kiwi dollar holds ahead of RBNZ
Mieneke Perniskie, trader of financial markets, said the Kiwi dollar “tracked moderately higher” early in the week as the US dollar weakened, but gains were capped ahead of the NZ labour market print.
“A 25bp cut is firmly priced in, but market participants are wary about making bets that we will see the terminal OCR at 2.50%, despite it becoming clearer that this is what is needed to provide some expansion in the economy. Current settings are too neutral,” Perniskie said.
The NZD/USD closed the week at 0.5955, while NZD/AUD traded between 0.9110-0.9150. The Reserve Bank of Australia is expected to cut its cash rate this week, but any surprise hold could push NZD/AUD back to 0.9000-0.9050.
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