NZD firms ahead of labour market data

 The New Zealand dollar jumped 1 percent on stronger-than-expected September quarter jobs data that has economists now wondering whether the central bank will ditch talk of the possibility of an interest rate cut when it releases its latest monetary policy statement tomorrow.  

The kiwi traded at 67.34 US cents at 12:20pm versus 66.67 US cents just prior to news that the unemployment rate fell to 3.9 percent in the three months through September, from 4.4 percent in the June quarter. 

The rate was well below the 4.4 percent forecast in a Bloomberg poll of 13 economists and was the lowest since the June quarter of 2008 when it was 3.8 percent, Statistics New Zealand said. 

The labour data is of particular interest as the central bank now has the additional goal of "supporting maximum levels of sustainable employment within the economy" as well as the existing goal of price stability when setting monetary policy. 

The central bank is widely expected to keep rates on hold at a record low 1.75 percent at tomorrow's review. But the statement will be closely scrutinised to see if there are any changes to its forecasts and whether it continues to reiterate that the next move in rates could be up or down depending on how the data unfolds. 

"At 3.9 percent, the economy has already achieved 'maximum sustainable employment'. Inflation is racing towards 2 percent sooner rather than later, and not just via energy prices," said Annette Beacher, chief Asia-Pacific macro strategist for TD Securities. "The RBNZ cannot avoid these simple facts at tomorrow's official cash rate review/monetary policy statement and needs to bin its rate cut scenario."  

"Today’s figures suggest that the very tight market is likely to be in little need of additional policy stimulus and the hurdle to official cash rate cuts looks to have risen," ASB chief economist Nick Tuffley said. 

Both Tuffley and Beacher agree, however, that wages growth is still not responding to the tight labour market. 

"The third quarter labour market data did not scare the inflationary horses and are unlikely to prompt a rethink on official cash rate settings," said Tuffley. 

ANZ Bank, which has consistently reiterated it still sees a rate cut as the most likely scenario, said the data "adds to the weight of evidence that suggests that RBNZ has breathing room with the official cash rate." 

"The labour market has undoubtedly been resilient in the face of downbeat business sentiment and the economy losing steam," ANZ senior economist Liz Kendall said. "This is expected to continue to support household spending. Trends in the labour market tend to lag the overall economy, so this doesn’t mean the labour market is immune to risks, but the strong starting point suggests it is in good stead for now." 

She noted, however, underlying wage inflation is weak and is expected to improve only gradually.

Kendall said the data "reaffirms that there are risks on both sides of the ledger. Waiting and watching developments remains a prudent approach." 

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