New Zealand has moved closer to getting an interest rate rise after its strongest jump in employment for 24 years, a point seemingly acknowledged by Reserve Bank Governor, Alan Bollard, in a speech yesterday.
His speech came an hour or so before the unemployment numbers were released showing a fall in the jobless rate from 7.1% in the December quarter to 6% on the three months to March.
It was the biggest fall since 1986 and is good news for the country, business and the government as it prepares its budget for release later this month.
The slump on global markets, especially overnight Thursday, might delay a rate rise if it persists.
The falls in Europe and on Wall Street last night were very volatile and worrying. That rise in uncertainty might see the RBNZ hold fire next month.
Mr Bollard said in his speech that the country’s economy was "less fragile" than it had been, thanks to a recovery in exports as the surging Asian economies have dragged the region out of the slump.
He also explained last week’s post meeting statement which held rates at 2.50%, but which suggested a rise could come soon.
“New Zealand has been fortunate in some respects, allowing most of our crisis liquidity and guarantee measures to be terminated.
"Conventional monetary policy will now guide the stages of recovery,” Dr Bollard said in a speech in Dunedin, a point the market seized upon.
“Overall, we are emerging from the crisis with some reconstruction of our external deficit, as a result of strong exports, weaker import growth, suppressed domestic profits, and some consolidation of balance sheets,” Mr Bollard said.
But he said that the domestic sector is seeing "a more fragile recovery, with business bruised but not permanently scarred".
"It is behaving very cautiously, still not looking to invest in plant and equipment or re-employ staff."
Mr Bollard’s comments saw the Kiwi dollar jump past 72.50 USc and Bloomberg said it made gains against all 16 major currencies.
"In the household sector, there have been only a soft pick-up in house prices, new building and sales," Mr Bollard said.
"Householders are building up savings and reducing debt.
Dr Bollard said the stage is set for the Bank to influence the pace of recovery through more conventional discretionary monetary policy.
“In our Official Cash Rate Review last week we noted: ‘…we expect to begin removing policy stimulus over the coming months, provided the economy continues to evolve as projected.
“We used the words ‘begin removing stimulus’ deliberately. With an official cash rate at a historically low level of 2.5 percent we are clearly in a very stimulative position.
“Using a truck driver analogy, our foot is strongly on the accelerator. Over coming months we expect to reduce the pressure on this pedal, but in effect to keep some throttle going. Truck drivers know they must reduce acceleration long before the corner. We are not talking about tightening policy yet. We do not expect to have to touch the brake pedal for some time.
“Financial markets currently expect the Reserve Bank to begin raising the official cash rate around the middle of the year and continue to do this in small steps for some time. This is broadly in line with our current views as outlined at last week’s OCR Review.
“However, the timing and pace of returning the OCR to more normal levels will ultimately depend on economic developments. Both markets and ourselves foresee that the official cash rate will not need to rise as far in this cycle as it did in the last one.
“But a final caution: recovery so far has been full of surprises. There will be more to come.”
So when the better than expected jobs figures came out, the market decided that a rate rise will happen at the RBNZ board meeting next month. And that was that.
Employment rose 1% or about 22,000 jobs in the first quarter to 2.18 million.
That compares with the market forecast for a rise of 0.2%.
The number of people out of work dropped 25,000 to 140,000.
The increase in employment was unusual given that the end of temporary work during the Christmas and summer holiday period usually sees unemployment increase in the first quarter, according to the report from Statistics NZ.
"This is the first decrease in the unemployment rate since the December 2007 quarter in the Household Labour Force Survey, which is based on a representative sample of 15,000 New Zealand households," Statistics NZ said.
“Typically in the March quarter, temporary employment associated with the Christmas and New Year period and seasonal agricultural activity declines, and unemployment increases,” said manager of labour market statistics, Peter Gardiner.
“But this March quarter we have seen an unexpected fall in unemployment, particularly among young men, which is accentuated when seasonal influences are removed.”
"The rise in employment during the March 2010 quarter followed a revised increase of 0.1 percent in the December 2009 quarter. Employment rose for both men and women, primarily driven by a rise in full-time employment for men (up by 19,000). Part-time employment fell by 3,000 during the quarter. In line with the rise in employment, actua
