Unemployment figures point to a June OCR hike

Weak domestic economic data has reduced some of the urgency for the Reserve Bank to unwind stimulus and this has led to a change of mind for many economists picking when the official cash rate (OCR) will rise, with June now the predominant view.

Tuesday, February 9th 2010, 7:27AM

In the December 2009 quarter the unemployment rate jumped to 7.3%, the highest in ten years and much worse than the Reserve Bank's forecast of 6.6%.

ASB Business Weekly had predictions of an April hike last week alongside JP Morgan, Westpac, the Deutsche Bank and the markets.

"Recent events have been piling up one straw after another on our view of an April OCR rise and suggest that the Reserve Bank will start lifting the OCR slightly later," ASB Business Weekly says.

"There is no one single event to point to, but together a number of developments suggest a June start to the tightening cycle is slightly more likely than an April start."

BNZ Markets Outlook says interest rates rallied and steepened significantly in the week with the major drivers being an unexpected pause by the Reserve Bank of Australia which left its rate at 3.75% as well as New Zealand unemployment coming in unexpectedly high.

"This combination saw the market move the projected hiking track back significantly, with the April meeting now priced as just a 40% chance of a hike and a further 25 basis points priced for the June meeting."

ANZ Market Focus is also pricing a hike in June however it feels it would need to see a major deterioration in global markets for the market to price out more rate hikes.

When looking at borrowing strategies it says rates have fallen a long way, and are now at levels that would have looked good relative to budgets set during Q4. However, if the economy isn't doing as well as imagined, then perhaps rates could be lower, which argues for caution.

J.P.Morgan Weekly Prospects believes we have seen the low point in the Kiwi unemployment cycle and with business confidence firming, hiring intentions increasing, and wage growth poised to accelerate, the labour market should tighten in 2010.

Westpac Weekly Commentary is going against the grain this week and leaving its OCR forecasts unchanged for now as it believes the soft employment figures need to be weighed against Friday's retail spending figures, which it expects will show that the consumer is back in a big way.

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