New Zealand economy is getting overheated, says economist

New Zealand economy is getting overheated, says economist

- The economy in New Zealand was worse than expected as the unemployment rate declined in the second quarter, as the recovery at the economy boosted hiring and began to stimulate wage inflation. The kiwi dollar rose as traders bet that the Central Bank could increase interest rates in two weeks.

The jobless rate fell to 4% from a revised 4.6% in the first quarter, Statistics New Zealand said Wednesday in Wellington. Economists expected 4.4%. Employment rose 1% over the previous three months. In the private sector, ordinary time wages rose the most in 13 years.

Annual inflation climbed in the second quarter to 3.3%, breaching the 1 - 3 target range of the central bank.

'At full employment, the economy is getting overheated, said Sharon Zollner, chief economist of ANZ Bank New Zealand in Auckland. "The RBNZ has to hike the OCR promptly to get on top of this.

The kiwi dollar was reversing after the report. It bought 70.58 U.S. cents in Wellington at 2: 45 p.m. from 70.24 cents immediately before the release. Two-year swap rates rose 11 basis points to 1.25% - the highest since late 2019 - as traded rates have been flat since 2017.

Investors lifted bet on rate increases, with a quarter-point hike now fully expected for the RBNZ review on 18 Aug and at least one more expected by the end of the year. Economists at JPMorgan, asb Bank, Bank of New Zealand and ANZ said they now expect three rate rises this year taking cash rate from 0.25% to 1%.

The data show the RBNZ is well behind the curve. Things are going to get tighter, said Stephen Toplis, Director of Research at BNZ in Wellington. The RBNZ, which is required to support maximum employment as well as achieve price stability, began reducing quantitative stimulus last month by ceasing quantitative easing, saying economic conditions had been consistently stronger than anticipated since late 2020.

Yesterday, Governor Adrian Orr said that spending has recovered to above normal levels and the Monetary Policy Committee needes to think about when and how we would return interest rates to pre-Covid levels.

New Zealand is in the vanguard of developed-world central banks that are beginning to normalize policy and it is likely to become one of the first to raise rates in wake of the pandemic. South Korea has also signaled it could raise borrowing costs this year.

Yet, the Federal Reserve last week indicated there is some way to go before it starts to increase bond buying, while Australia said yesterday that it doesn't expect to raise rates before 2024.

Employment rose for a third straight quarter after a slumping in mid-2020 and also gained 1.7% from a year earlier. Economists forecast 1.2% annual growth. The participation rate increased from 70.4% to 70.5% in the three months until March, yelling economists' projection.

Statistics New Zealand said the underutilization rate, which is a broader gauge that includes employed persons seeking additional hours, fell from 12.1% in the first quarter to 10.5%.

Ordinary wage rates for non-government workers rose 0.9% in the quarter, the highest since 2008, statistics agency said. From a year earlier, wage growth picked up to 2.2% from 1.6% in the 12 months through March.