MUFG's analysis of New Zealand's latest labor market report suggests it was stronger than expected, leading to reduced market expectations for an early rate cut by the Reserve Bank of New Zealand (RBNZ). Despite a rise in unemployment to a two-year high of 4.0%, it was below the RBNZ's November forecast of 4.2%. Unexpected employment growth in Q4 and a tighter labor market could delay the RBNZ's shift to a more neutral policy stance, potentially affecting rate cut timelines.
Labor Market Resilience: New Zealand's labor market ended the year stronger than anticipated, with employment growth of 0.4% Q/Q in Q4. This resilience suggests a tighter labor market, challenging the RBNZ's expectations of stalling employment growth and a sharp rise in unemployment in 2024.
RBNZ Policy Outlook: The labor market's strength may deter the RBNZ from adopting a neutral policy stance at its next meeting on February 28. However, a potential slowdown in employment growth and an increase in labor supply could lead to higher unemployment rates, prompting rate cuts in H2 2024.
Rate Cut Expectations: The New Zealand rate market is currently divided on the timing of the RBNZ's first rate cut, with a roughly 50:50 chance of it occurring in July and full pricing by August. A delayed start to rate cuts could offer modest support to the New Zealand dollar (NZD), though global growth concerns and low commodity prices continue to exert pressure.
MUFG highlights the unexpected strength in New Zealand's labor market, tempering immediate expectations for RBNZ rate cuts. While a slower initiation of rate cuts might support the NZD, external economic challenges and commodity price trends remain influential factors. Investors and policymakers will closely watch upcoming employment data and the RBNZ's response to evolving labor market conditions.