Tough economic conditions about to hit jobs market
‘‘We’re now at a point where those vacancies have been absorbed, and from here on in we are predicting a small but significant rise in unemployment from around 4% to just over 5%.’’
Reserve Bank Governor Adrian Orr
A “huge stock” of job vacancies that has shielded people from rising unemployment has been eaten away by a historically significant level of immigration, Reserve Bank Governor Adrian Orr has told MPs.
Appearing in front of Parliament’s finance and expenditure select committee to explain the bank’s decision to keep the official cash rate (OCR) on hold on Wednesday, Orr made it clear that this meant tougher economic conditions were about to bite in the jobs market.
The biggest difference between the bank’s forecasts and what had played out in the economy was that unemployment hadn’t had to rise as far as it had feared to get inflation down. This was because wage pressures had been subdued by net migration, he said.
“We’re now at a point where those vacancies have been absorbed, and from here on in we are predicting a small but significant rise in unemployment from around 4% to just over 5%.”
The bank’s Wednesday monetary policy statement was described as “dovish” by Kiwibank chief economist Jarrod Kerr, as its forecasts slightly lowered the chances of a further hike in the OCR.
Orr told the committee its current emphasis was on “waiting” as it watched, worried and waited on inflation to fall back into its target range.
“‘Wait’ would be the biggest of those three words.”
But he said it was a misconception that central banks had to keep raising interest rates to be pursuing a tight monetary policy.
To be tight, the OCR just had to be higher than the neutral interest rate.
Orr said it was too early to say whether tax cuts being planned by the Government would mean that interest rates would need to stay higher for longer.
“Once decisions are made and formalised through Cabinet, and the Treasury have had their chance to say, ‘This is what it means for the balance sheet’, then we will talk about it on the way through.”
The Reserve Bank is forecasting house prices to rise at an annual rate of about 5%, but Orr emphasised that this was hard to predict. There were “compelling arguments” on both sides that the outcome could be different either way, he said.
“We are seeing a rise in rental prices because our supply growth is slowing at the same time as our population is rising.”
There was “real concern” over whether there was a sufficient number of dwellings, he said.