The biggest recorded surge in migration in 100 years into New Zealand has increased growth in the economy, but hasn't driven up inflation, the Reserve Bank says.
In a speech at Otago University today, Reserve Bank Deputy Governor Geoff Bascand says the biggest driver of the rapid growth in the workforce is labour supply and increased participation.
New migrants, women and older workers delaying retirement have all contributed to this.
"Over the past four years New Zealand's population has grown by a quarter of a million people, with over half that number coming from net migration. The economy has expanded steadily since 2011 and created 180,000 extra jobs, but the unemployment rate has declined only modestly.
"Higher labour force participation by women and older workers, together with the characteristics of this particular migration cycle, go a long way to explaining why wage and non-tradables inflation pressures have proven less than expected."
Migrants increase overall spending in the economy as well as increase labour supply, but their net effect on inflationary pressures can be "ambiguous".
Mr Bascand says the migrants see New Zealand as an attractive destination because of weakness in the Australian and world economies.
Because the New Zealand's labour supply has increased when businesses are facing lower world demand, it leads to lower wage and inflationary pressures.
To help it keep track of the sometimes contradictory movements in the labour market, Reserve Bank researched have come up with a new indicator which brings 17 variables into a single composite index.
Mr Bascand said the labour utilisation composite index shows supply and demand in the labour market have broadly been in balance since early 2014.
"Stronger than expected labour supply, and greater than expected slack, has been a factor in our assessment that monetary policy should remain accommodative," Mr Bascand said.
ASB senior economist Jane Turner says the speech suggests less weight should be put on the unemployment rate when considering what the Reserve Bank might do.
However, she still expects the official cash rate will be cut to 1.75 percent over June and August this year.
She says the new index almost matches the output gap and is ideal for understanding the relative slack in the labour market and how it contributes to inflationary pressures.
"However, from a market's perspective, it may add to the complexity of interpreting the labour market data quickly after its release and, importantly, predicting how the Reserve Bank will react to it."