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RBNZ unlikely to be concerned about wage growth

New Zealand: RBNZ unlikely to be concerned about wage growth

Growth in private sector labour costs (as measured by the LCI) in New Zealand rose 0.8%q/q in 2Q (JPMorgan and consensus 0.8%) after rising 0.7% in 1Q. The all sector labour cost index grew 0.8%q/q (JPMorgan and consensus 0.8%), also up from 0.7% in the previous three months.

Tight labour market conditions and the relentless outflow of skilled workers have kept upside pressure on wages in New Zealand for some time. That said, as economic momentum stalled in the Kiwi economy in 2H, the labour market began to show tentative signs of loosening as firms started to shed human capital in a bid to cut costs. Additional job insecurity and redundancies will mean that workers probably will continue to curb spending in coming quarters, weighing even further on the economic growth outlook.

In recent commentary, RBNZ Governor Alan Bollard said that “The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.” Amid such expectations, despite that inflation remains above the RBNZ’s 1-3%oya target range, Dr. Bollard cut the official cash rate (OCR) in July by 25bp from a record high of 8.25%. Further rate cuts are expected this year, with our forecast calling for the OCR at 7.25% by year-end.

The next key piece of labour market data is the employment print on Thursday. After an unexpected contraction in employment in 1Q of 1.3%q/q, we expect a payback in 2Q of 0.3%.

• The all sector labour cost index rose 0.8%, or 3.5%oya; this was the largest annual increase since the series began in 1992.
• The private sector labour cost index rose 0.8%, or 3.4%oya.

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