Tony Alexander: Why April’s interest rate decision is the one that really matters

ANALYSIS: Something interesting happened in the United States last Friday. Data showed that rather than rising only 185,000 in January, employment increased by a large 517,000 while the unemployment rate fell to a half century low of 3.4%. This is important because it suggests the labour market and therefore things like consumer spending, house-buying, house construction, and wages may be stronger this year than previously thought.

In fact, the figures were so surprising that some economists now say the chances of recession in the US are fairly small. Maybe. We will have to see what the next monthly jobs growth outcome is and whether other indicators show similar surprising strength.

Is there a lesson here for us in New Zealand and for our housing market in particular? Again, maybe. Businesses cannot find the labour they want and in the US it looks like the tens of thousands of people laid off in the tech sector are being snapped up quite quickly.

Here we know that some sectors are struggling and are going to lay off personnel. But businesses continue to report big difficulties finding staff and that suggests people put out of work will be picked up again relatively quickly – which is an illustration of why the Government’s income support scheme for those made redundant is a bad idea as it would remove the incentive to fill another job within six months.

There is little chance that the unemployment rate in NZ will rise above 5.5% as Treasury and the Reserve Bank predict. Does that mean wages growth won’t slow enough to allow interest rates to appreciably fall for a long time? Not necessarily. Our own employment data released a couple of weeks ago showed that whereas average hourly earnings rose over 2% in each of the September and June quarters of 2022, in the December quarter the rise was only 0.9%. Wages growth looks like it is slowing.

I can also look into my monthly Spending Plans Survey of Kiwi consumers and see evidence of wage restraint. I ask people why they are planning to spend generally more or less over the coming 3-6 months and include some options as to why. One of them relates to people’s expectations for growth in wages and salaries.

Independent economist Tony Alexander: “There is little chance that the unemployment rate in NZ will rise above 5.5%.” Photo / Fiona Goodall

On average 2.6% of people say they expect higher wages and that reading in early November was an above average 3.5% from 3.4% in October and 3.2% in September. But in December the measure fell to -1% and this month is -0.5%. I read that to mean some of the heat is coming out of the labour market and that is important.

It suggests that even if and most probably when the Reserve Bank sees jobs growth coming in stronger than they have allowed for, this does not necessarily mean it will feel monetary policy needs to be either tightened more than indicated in November or eased more slowly.

This in turn means we can still reasonably think that the recent round of cuts to bank fixed mortgage rates for periods of two years and beyond will be sustained. But what about the popular one-year fixed rate? That probably won’t get cut by the banks until there is a lot more certainty in the market that inflation is beaten and monetary policy is within nine months of being eased.

We won't be at that point come the next cash rate decision on February 22. But we might for the one after that on April 6. That is going to be a far more interesting rate review that the next one.

- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz