Unemployment up but lack of wage inflation points to unchanged interest rates

New Zealand's labour market showed gradual improvement in the second quarter as unemployment edged up, wage growth remained subdued and more people looked for work, signalling interest rates are likely to remain on hold this year.

The unemployment rate increased to 6.4 percent in the three months ended June 30, higher than the 6.3 percent expected by economists in a Reuters poll and coming off a three-year low of 6.2 percent last quarter.

An extra 5000 people were looking for work and the participation rate increased 0.1 percentage point to 68 percent as private sector wages rose 0.4 percent, Statistics NZ says.

Reserve Bank governor Graeme Wheeler last month said interest rates are likely to remain at a record low of 2.5 percent this year, with future hikes looming as growing momentum in the housing market and construction sector spills over into inflation pressures.

There were no indications in today's release that higher wages were pushing up inflation, economists say.

"The key thing for markets and for the Reserve Bank in this release was signs of wage inflation," says Dominick Stephens, chief economist at Westpac Banking Corp.

"The labour market is showing signs of an ongoing gradual slow improvement. There are still plenty of people unemployed, that means labour is pretty available and there is no sign that wages are really picking up.

"The Reserve Bank will feel very comfortable with its current stance." 

Wage pressures remained subdued, the statistics department says.

The labour cost index of private sector wages rose at an annual pace of 1.7 percent in the second quarter, down from 2 percent this time last year and below the 1.8 percent rate economists had expected.

Wage rates for just over half of the positions surveyed increased during the year. Of those that rose, the average increase is the lowest since the December 2000 quarter at 3.4 percent, according to Statistics NZ.

"The main reason for very low wage growth is very low inflation," Mr Stephens says. "The cost of living is going up very slowly and wages are going up just a little bit faster than that."

Canterbury, which is being rebuilt following a series of earthquakes, continued to lead employment growth, with the number of people employed up 5.5 percent over the year and the unemployment rate dropping to 4.4 percent from 6.5 percent in the June 2012 quarter.

In the year to the June quarter, salary and wage rate growth including overtime in the Canterbury construction industry slowed to a 3.6 percent pace from 4.3 percent growth in the previous quarter. For the rest of New Zealand, wage growth in the construction industry rose 2.1 percent.

"The labour market is strengthening very gradually and, in particular, the Canterbury rebuild has really ramped up," Mr Stephens says.

"The danger here is that we run out of workers to undertake the rebuild and that forces wages higher and it could force wages higher for all businesses which would then force them to put their prices up and could create an inflationary dynamic.

"That is still a danger. Over the course of the next year we will be looking for those types of dynamics." In the near term, unemployment falling below 6 percent could spur wage acceleration.

(BusinessDesk)