New Zealand unemployment drops to 10-year low, chance of rate cut distant

  • New Zealand's third quarter unemployment rate dropped to a surprise 10-year low on Wednesday, sparking a rally in the local currency as the chance of a central bank interest rate cut grew increasingly distant.
  • The unemployment rate dropped despite an uptick in the labor participation rate,

Factory workers at Barnes Wild Bluff Oysters factory open oysters on March 2, 2018 in Bluff, New Zealand. 
Dianne Manson | Getty Images News | Getty Images
Factory workers at Barnes Wild Bluff Oysters factory open oysters on March 2, 2018 in Bluff, New Zealand. 

New Zealand's third quarter unemployment rate dropped to a surprise 10-year low on Wednesday, sparking a rally in the local currency as the chance of a central bank interest rate cut grew increasingly distant.

The Reserve Bank of New Zealand's (RBNZ) Official Cash Rate (OCR) meeting will be held on Thursday. The government in March added a goal of maximizing sustainable employment to the central bank's mandate, alongside inflation targeting.

The New Zealand dollar rallied more than 1.1 percent against the dollar to a three-month high of $0.6740.

The unemployment rate dropped to 3.9 percent over the previous quarter, well below the 4.4 percent rate recorded in the last quarter, and is the lowest since the June 2008 quarter, when it was 3.8 percent. Nevertheless, annual wage growth remained a relatively modest 1.9 percent.

Economists polled by Reuters had forecast an unemployment rate of 4.5 percent.

The unemployment result suggested the RBNZ could tone down a previous suggestion the next rates move be a cut when it releases its monetary policy statement on Thursday.

A Reuters poll this week showed the central bank is widely expected to hold interest rates at 1.75 percent in its meeting this week, as policy makers would wait to see if a recent acceleration in inflation and better-than-expected growth figures are sustainable.

ASB Chief Economist Nick Tuffley said in a note that the hurdles for an interest rate cut have certainly increased following the unemployment figures.

"The next move in the OCR is likely up, but not until concrete signs of firming wage inflation emerge, which looks to be 2020," said Tuffley.

Economic growth, employment, and inflation numbers have come in higher than the RBNZ's forecasts in the recent months.

The employment growth rate in the quarter more than doubled to 1.1 percent, from 0.5 percent in the previous quarter.

Economists had predicted an employment growth of 0.5 percent.

The unemployment rate dropped despite an uptick in the labor participation rate, which has climbed to 71.1 percent from 70.9 percent in the previous quarter, the data showed.

Wage inflation has been tepid in recent years even as employment has grown. Quarterly wage growth slowed to 0.5 percent in the third quarter from 0.6 percent in the previous quarter.

"While this quarter's unemployment rate is outside market expectations, we know New Zealand has a small economy with a dynamic labor market, and large changes, both up and down, have happened before — in late 2012 and 2015," Statistics New Zealand labor market and household statistics senior manager Jason Attewell said.