Economists expect year of low rates
The Reserve Bank is expected to leave interest rates at record lows for another year, as a hot jobs market fails to generate inflation.
On Thursday the Reserve Bank will publish its quarterly monetary policy statement and review the benchmark official cash rate (OCR), widely expected to be unchanged at 1.75 per cent.
A day earlier, Statistics New Zealand will publish the household labour force survey.
Although some observers are forecasting a small increase in the jobless rate, both Westpac and Bank of New Zealand are predicting unemployment will fall to 4.5 per cent, a new nine-year low.
Unemployment has been falling gradually for more than five years, from close to 7 per cent in 2012, a sign that the economy may be running at close to full speed.
This would typically tend to call for interest rates to be raised from the current record lows to a more ‘‘neutral’’ level.
But the recent strengthening of the jobs market, which has firms reporting more difficulty in finding skilled labour than at any time since 2005, has come with little wage growth or inflation.
In late January Statistics NZ said the consumer price index slowed to an annual rate of 1.6 per cent, well below expectations, prompting several economists to push back the timing of increases.
Westpac economists warned this week that the phenomenon was expected to continue.
‘‘A range of factors including new technology have also been suppressing inflation for years, and we expect this trend will continue – we doubt that inflation would accelerate in the fashion the Reserve Bank expects, even if [economic] growth did accelerate.’’
Economists at all of the four major Australian banks now expect the OCR to be unchanged until at least early 2019.
The Reserve Bank’s own forecasts suggest it believes the OCR might not be increased until 2020.
Tomorrow’s employment numbers are expected to portray a strong labour market, even though there is a risk that the unemployment rate could rise slightly, while the number of people employed may drop.
The last labour market statistics for the three months to September 30, 2017, said 58,000 new jobs had been created in the quarter, which BNZ senior economist Craig Ebert described as ‘‘outrageously strong’’, with a risk that the employment rate may have fallen in the final three months of 2017 .
While the National Party has said the figures show the economy is approaching full employment, wage growth has remained modest, with the labour cost index expected to have increased at about 2 per cent in 2017, partly boosted by the pay equity settlement for government-funded care workers.
The weak outlook for interest rates in New Zealand is increasingly in contrast with major central banks around the world.
After slashing interest rates to effectively zero in the wake of the global financial crisis, central banks in Europe, Britain and the United States are all expected to progressively raise interest rates this year.