Mark Smith: ASB Senior Economist ahead of today's employment data release

The Reserve Bank will be keeping a close eye on this morning's employment data as it mulls over next week's Official Cash Rate decision. 

Most economists expect the unemployment rate will rise. 

But they're now divided on whether the central bank will cut the OCR next week, next month, or in November. 

ASB senior economist Mark Smith told Ryan Bridge this morning's data should give them a steer on how inflation is tracking. 

He says as the unemployment rate rises and wage growth slows, inflation is likely to come down, meaning interest rates need to come down as well. 

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Episode Transcript

Speaker 1 (00:00):
It's a big day today for mortgage holders. Basically, are

(00:03):
enough people out of work to force the ocr down,
thereby taking the pressure off our mortgages. Unemployment data for
the June quarter is out today. The Reserve Bank is
expecting unemployment rate to rise to four point six percent.
It's currently at four point three percent for quarter one.
A n Z, ASB Kiwibank Westpact, they all predict an
increase to four point seven percent, b n Z saying

(00:26):
four point six Joining me now as ASB Senior economist
Mark Smith, Mark, good morning, Good morning. What's the magic number?
Do you think what is the magic number we would
need to see today in order for their to be
a cut, say next week?

Speaker 2 (00:41):
Well probably that's the higher the numbers, the more likely
you'd like to see a cat. It's not just the
unemployment rate, but also things like labor costs and wages
that the Reserve Bank are looking at very closely.

Speaker 1 (00:54):
Will they how how well? To what extent is it
the job's data versus that sticky domestic inflation that we've
been watching.

Speaker 2 (01:04):
Yeah, I think what we've seen is we're gone from
a period a few years ago where firms have been
hoarding labor. It's now a where firms are actually shedding
labor because the demind of environment is so weak and
they're having to do that. Also, firms profitability now is
very dire, you know, the weakest in about thirty years
as the share of income. So they're really in position

(01:24):
now where they can't really afford to hold on to
staff and had to let them guards. Now, when that happens,
what we'd like to see is this labors share of
income is likely to fall and inflation will fall as well.
So all of these things are interlinked. But really when
we see more spare capacity growing in the labor market
with the undepoman rate going up, that meets that inflation

(01:46):
will eventually go down, and that meant that means their
official cash rate needs to come down as well.

Speaker 1 (01:51):
The Aussies are playing hardballed yesterday the Reserve Bank there,
you know, no cuts till twenty twenty five, that sort
of thing. Do you do you believe them?

Speaker 2 (02:02):
Well, it's hard to say at the moment. Bear in
mind the Australian official their cash rate is four point
three five said ours is five and a half, so
that they're completely different. Also, the Australian economy is doing
better than the New Zealand economy. For example, the Australian
housing market is still doing very well. We're here, it's
down the dumps. New Zealand is flit think in and

(02:24):
out of recession. I would like to see a size
or contraction the economic activity in the middle of the
share So things in New Zealand are by and we
really deceive the OCI come down how.

Speaker 1 (02:35):
Much because they're obviously the committee that decides. They're all
humans and they can see themselves, presumably how much hurt
there is out there on main street? How much do
they do you reckon? They actually listen to that noise,
you know, to that political pressure as well well.

Speaker 2 (02:53):
They're obviously continent of what's happening around them. You know,
it's it's pretty clear how weak things are. But really
they've got an inflation targe to meet first, and at
the moment, inflation is at three point three percent. Now,
if you take out costs, for example, it's already below
three percent. So from that point of view, yes, they
should be in the ocr but they want to make

(03:14):
sure that inflation will settle below three percent before cutting that.
You're right, you look around you the unumplement rate is
going up. We expect to hit around five and a
half percent by the end of the year and it's
contrack to move around six percent by five both oft
of next year as well. So things that are certainly
calling and there are certainly needs for the SCO to
come down.

Speaker 1 (03:34):
Mark. Thank you. That's Mark Smith, the ASP Senior Economist.

Speaker 2 (03:38):
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Speaker 1 (03:42):
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