For Kiwis, Respite From Rate Hikes Unlikely Soon Amid Worker Shortage

Wednesday, 7 September 2022, 5:17 am
Press Release: Kalkine

Highlights

• With inflationary pressures, most central banks, including the Reserve Bank of New Zealand (RBNZ), are on a rate hiking spree.
• Wage inflation is at a record-high level, unemployment is low, and the industry is not finding enough workers.
• Higher wages can add to the purchasing power, which can spur demand, and prices might continue to be in the higher territory

There is a reason why any central bank adjusts the policy rate. Most of these banks have a target to meet in terms of inflation. The Fed, for example, has a target of 2%. This means that the central bank of the world’s largest economy makes all manoeuvres to maintain the annual change in price index at 2%.

By tweaking the policy rate, a central bank can decisively influence credit growth in the respective economy. When rates rise, individuals and businesses borrow less and save more, which leads to decreased cash flow in the economy. With a drop in liquidity, people start spending less and demand plummets, eventually leading to a fall in price levels. At a time when severe inflationary pressures grip the world, most central banks, including the Reserve Bank of New Zealand (RBNZ), are on a rate hike spree.

High rates in New Zealand

The RBNZ aims to maintain inflation between one to three percentage points over the medium term. In the present scene, when inflation is at a multi-decade high level, the central bank last month had no option but to go for yet-another 50 basis points (bps) hike in the official cash rate (OCR). Now, the OCR is at 3%, its highest level in many years. The rate is very likely to reach 4% by early 2023.

The hot housing market of New Zealand has finally cooled off. in July this year, the first annual decline in the Real Estate Institute’s price index was observed in over a decade. However, there is also a noticeable dip in the sales volume. This means that the demand frenzy, even during peak house prices, has become a thing of the past. Higher mortgage rates and the fear of a recession hitting the economy are weighing on the sentiments of homebuyers. Even though unemployment in the economy is at a record low level, such a positive indicator has yet to turn into a demand push in the housing market.

Separately, Stats NZ has reported another quarter of muted retail sales in the country. For the quarter ending 30 June 2022, sales dropped 2.3%. This follows the 0.9% decline in retail sales in the March quarter. The overall demand in the economy is subdued. However, the RBNZ, which eyes inflation and not the economy’s performance, is set to raise rates over the coming months.

Also read: Inflation higher in NZ than Australia: Check out responses of central banks

Dearth of workers

Macroeconomic indicators were already in a mess, and now the worker shortage issue has started to trouble the economy. From the aged-care sector to hotels to the meat industry, the dearth of nurses, hospitality staff and low-wage workers is now a matter of concern. There are fears that workers are migrating to other economies, including Australia, for higher wages. All this is when growth in wage inflation -- measured using the labour cost index (LCI) for all salary and wage rates -- in the June quarter was at the highest level in 14 years.

Data compiled by Stats NZ also highlighted that every two in three roles surveyed witnessed a growth in ordinary-time wages, which is for the first time in nearly a three-decade period. Such high salaries have, however, failed to rid the economy of worker shortages. What could make matters worse is the tight global labour market, which might not allow New Zealand to get enough workers in the near-to-medium term to meet demand.

Economists are suggesting that the growth in wages would surpass inflation in 2023. This could add to the purchasing power of Kiwis and can further stoke price rises. Even though data on housing and retail spending reflects a slowdown, demand could pick up if wages continue to rise in the coming days.

Also read: Is NZ’s Budget 2022 going to be a `Well-Being’ one?

Interest rates to stay at higher levels

When the OCR touched 3% lately, it was the highest in many years, but things can go even far. The rise in median weekly earnings, another key measure of wages and salaries in the economy, was lately reported at more than a two-decade high level. It was found that the earnings of women have jumped at the steepest rate since the beginning of the data series on median weekly earnings.

Employers do not want to lose workers, which is why they spend on labour. Increased wages can revive the purchasing power and spur demand in the coming months. A continued inflationary pressure, which many economists say can linger on over several years, will likely leave little room for the RBNZ to ease up on its aggressive monetary policy stance. A high OCR would keep all lending rates, including mortgage loans, hovering in the higher territory. A slump is already underway in the country’s housing market, and even declining house prices might not lift demand due to mortgage rate pressures.

How things would unfold with respect to recession would become clear by the first half of next year. For now, the RBNZ is set to stay on its rate hiking path. The shortage of workers in the economy will likely keep wage inflation at higher levels and vindicates the central bank’s hawkish stance.

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