Labour growth results in strong consensus for June hike

The labour market numbers for the March quarter shocked economists and the market yesterday and prompted a shift in market pricing for when the Reserve Bank will start raising the Official Cash Rate (OCR).

Friday, May 7th 2010, 10:10AM

by Jenha White

In the BNZ Weekly Overview, economist Tony Alexander says the quarterly Household Labour Force Survey data showed a labour market in far better shape than anyone thought.

Job numbers rose 1% during the quarter (22,000 people), rather than firming just 0.2% as had been the common expectation.

The unemployment rate dropped sharply back to 6% from 7.1% though this is still up from 5.1% a year ago.

Alexander says the implications for monetary policy are quite clear.

"The Reserve Bank is now quite likely to start taking away the stimulatory 2.5% cash rate come June 10 and that is now the strong consensus rather than late-July."

 The question in people's minds is, will the jobs growth be sustained?

Alexander says not at 1% a quarter. But the headline result will get the attention of employers who are aware that the market will tighten up again.

"So continued jobs growth is highly likely. Add that to the outflow of skilled people to Australia and labour shortages could be back in many sectors come late-2011."

Taking all this into account, Alexander says as a borrower he would be happy to sit with his mortgage floating.

"I do not yet feel the time is right to opportunistically hop into a one to three year rate to do better than where the floating rate will average over those periods of time - if our forecasts prove correct.

"They will change of course because after all, every week we learn something we did not know before."

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