Economist warns significant Official Cash Rate hikes likely if wages continue to rise, unemployment drops

A leading economist believes the latest labour market data will show the Reserve Bank (RBNZ) still has more work to do battling inflation. 

Statistics New Zealand will release labour market statistics for the September quarter on Wednesday. 

Infometrics Chief Forecaster Gareth Kiernan expects wage inflation to accelerate further to seven percent with the unemployment rate slightly dropping from the near-record low of 3.3 percent.

Kiernan told AM Early on Wednesday normally these would be positive figures but as the RBNZ continues to try and curb inflation it could mean further economic turmoil.

"We've seen inflation numbers higher than expected recently and that's already sort of placed upward pressure on interest rates and expectations of where the Official Cash Rate (OCR) will go," Kiernan told AM Early host Oriini Kaipara.

"The numbers we're expecting to come out later today are likely to be stronger than what the RBNZ had been anticipating in its forecasts a couple of months ago."

Kiernan said the data released on Wednesday will show the RBNZ still has work to do in its battle to tame inflation and is predicting further increases to the OCR. 

"The OCR is likely to rise by 75 basis points later this month and then push up towards five percent, possibly over five percent in the first half of next year," he said.

The latest Consumer Price Index figures for the September quarter showed annual inflation increased by 7.2 percent - down just 0.1 percent from the June peak of 7.3 percent.

Inflation began rising in March 2021 jumping from 1.5 percent to a whopping 7.3 percent in June of the next year. As a result, the RBNZ began hiking the OCR - making borrowing more expensive - in an effort to force Kiwis to spend less to reduce demand. 

The RBNZ has been lifting the OCR since October 2021 when it rose 25 basis points from 0.25 to 0.50. Since then, it has continued increasing until it reached 3.5 percent last month. 

Kiernan also expects the data to show it's a good time for workers to negotiate pay rises as businesses battle with staff shortages.

"Workers are in a very good bargaining position at the moment, given the lack of labour supply and lack of available workers that are out there," Kiernan told AM. 

"We also know that everyone's been facing cost of living increases, so there is strong pressure there from workers to actually be compensated for the rising cost of living and employers have had such difficulty finding and retaining staff that there is little choice for them but to accept those wage increases and to pass those costs on." 

Watch the full interview with Gareth Kiernan above.