VIEW: ASB Sees 2024 Rate Cut Unlikely On “Sticky” Labour Costs

ASB notes that the Q1 labour data was “mixed” and that the contraction in employment was not consistent with other sources showing resilient hiring. Conditions are easing but “sticky” labour cost growth is likely to make the RBNZ cautious re bringing inflation sustainably below 3% and so ASB believes rate cuts this year are unlikely.

• “Labour cost growth is also taking time to cool, and this could be reflective of residual tightness in the labour market, poor productivity (our post COVIID-19 performance has been poor) and a warning sign that protracted high consumer price inflation is also having persistent impacts on labour costs.”
• “We still expect the NZ unemployment rate to continue to move up and push above 5% by year-end with the unemployment rate to peak at around 5½% by mid-2025. This should further temper wage increases and significantly dampen pressures on core inflation.”
• “Nonetheless, the RBNZ will be wary of the risk that labour cost inflation holds up for longer, making it difficult to achieve sub 3% inflation within an acceptable timeframe. That caution means a longer period of restrictive OCR settings, with rate cuts unlikely to be delivered until 2025.”
• “There were signs of a discouraged worker effect on labour force participation that dampened the climb in the unemployment rate. If not for this, the unemployment rate would have been closer to 5% (ASB est. 4.7%).”