No Capital Economics, RBNZ won’t lift rates

Capital Economics believes that the Reserve Bank of New Zealand (RBNZ) will be forced to raise interest rates next year on the back of the tightening labour market:

The decline in the unemployment rate to 4.7% in New Zealand is consistent with our view that a continued tightening in the labour market will support the RBNZ to hike rates in 2022. The 0.6% q/q rise in employment was above the Bloomberg median forecast of a 0.3% rise and well above the RBNZ’s forecast of no change in employment in the quarter. What’s more, the rise in employment was more than enough to offset the 0.1ppt rise in the participation rate which meant the unemployment rate fell from 4.9% in Q4 to 4.7% in Q1…

In the quarters ahead a rebound in activity should further support the labour market. And forward indicators already point to strong labour demand with the recent surge in job ads consistent with the unemployment rate falling to around 4% before long. While the participation rate is still well below its pre-virus levels, we expect rising employment to reduce the unemployment rate in the months ahead. We think the unemployment rate will fall to near 4% by the end of 2022. That’s much more optimistic than the RBNZ’s forecast that the unemployment rate will rise to a peak of 5.2% in Q2 and remain above 5% until the end of 2022. Our view that the labour market is set to tighten much faster than the RBNZ anticipates is one reason why we expect the Bank to begin raising rates by the end of next year.

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