The Reserve Bank continues to face pressure to cut the OCR earlier, as economic pain continues and 33,000 more people find themselves unemployed, writes Anna Rawhiti-Connell in this excerpt from The Bulletin, The Spinoff’s morning news round-up.
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Calls for OCR cut continue
Kiwibank’s chief economist, Jarrod Kerr, has always been adept at injecting pop-culture stylings and enthusiasm into otherwise dry economic news. In describing next week’s official cash rate announcement as “the economist’s Superbowl,” it’s safe to say he and his brethren might be alone in their very high levels of anticipation. However, pressure has been growing for the Reserve Bank (RBNZ) to move sooner rather than later on cutting the rate.
In May this year, the central bank’s Monetary Policy Committee suggested the OCR should be held at 5.50% until August next year and could even go up another 25 basis points. In July, economists predicted a November cut after what was described as a “dovish pivot” by the RBNZ. There’s been a bit of oscillation between calls and forecasts this week, but Kerr has been joined by BNZ economists in a more forceful call to cut the rate immediately. Calling for and predicting are two different things and as interest.co.nz’s Dan Brunskill reports, BNZ’s economists also noted that “stronger than expected labour data could prompt some traders to back away from predicting imminent interest rate cuts.”
Unemployment rate highest in three years but not as high as expected
That data arrived yesterday, and while it’s cold comfort to the 33,000 more New Zealanders who are jobless compared to this time last year, it was “stronger than expected”. The Herald’s Liam Dann runs through the numbers here. Many were predicting an unemployment rate of 4.7%, and it landed at 4.6%. That’s still in line with the RBNZ’s predictions, is up on last quarter’s 4.3% and is the highest it’s been in three years but as Dann notes (paywalled), ANZ senior economist Miles Workman said the “data is ‘no smoking gun’ for early cuts”. As BusinessDesk’s Rebecca Howard reports, before yesterday’s labour data was released by Stats NZ, a 92% chance of a 25-basis point cut to the OCR next week had been priced in. As of yesterday afternoon, it was 55%.
Concerns about lasting damage and ‘wage scarring’
Back to forecast vs. calls, most economists believe the RBNZ has done enough to curb inflation. While forecasts are suggesting October or November for the first rate cut, the calls are still for cuts ASAP. Next week’s Monetary Policy Statement will be scanned for signals that an easing is on its way. ASB’s Mark Smith says, “The labour market looks set to significantly weaken from here, and this could cause longer-term economic damage if the RBNZ maintains as much pressure on the monetary policy brakes as it does currently.” Kiwibank’s Kerr expects the rate to hit 5% by the end of the year. There is also concern about lag, with the impacts of a rate cut taking a while to filter through the economy. RNZ’s Susan Edmunds reports this morning on the impacts of “wage scarring” with research suggesting “that the earnings of workers who found new employment after being laid off took almost three years to return to their previous level”.
Youth bear brunt of rise in unemployment
As RNZ’s Checkpoint reported last night, labour data showed that people aged between 15 and 24 make up almost half of the newly unemployed and that many of them want more work but cannot get the hours. The figures showed that youth unemployment rates were over 20% for those aged 15 to 19 and 8% for those between 20 and 24. As NZ Council of Trade Unions policy director and economist Craig Renney notes in Edmunds’s report on wage scarring, “The difficulty is that wage scarring for some groups has a much stronger impact, for young people being out of the labour market tends to have lifetime impacts much more than for older workers.”