Wages growth plagues inflation outlook

(See attached file: NZ_LCI_2Q_6aug07.pdf)

Wages growth plagues inflation outlook and will keep RBNZ at action
stations

New Zealand's Labour Cost Index (LCI) posted another solid gain of 0.6%q/q in the second quarter (following a 0.6%q/q rise in 1Q), taking the annual rate to 3.1%oya (off slightly from 3.2%oya in 1Q07, 4Q06 and 3Q06). Private sector wages grew at a slightly faster pace of 0.7%q/q (JPMorgan and consensus 0.7%), taking the annual rate to 3.1%oya - up from 3.0%oya in 1Q. Wages growth above 3%oya points to sustained pipeline inflation pressure, and will keep the RBNZ at action stations as the war on inflation is far from over.

According to Statistics New Zealand, overtime wage rates recorded a 3.9%oya increase, "the largest annual increase since the overtime series began in the December 1992 quarter", and followed a rise of 3.8%oya in 1Q. The rise in overtime pay is a product of New Zealand's air-tight labour market and an economy which is operating at close to full capacity. Average total hourly earnings, as recorded by the Quarterly Employment Survey (QES), also increased 4.2%oya.

LCI details:

In the year to 2Q, the largest industry-group annual increases in salary and wage rates (including overtime) were:

5.2% for finance and insurance;
4.9% for health and community services;
4.4% for mining;
3.6% for machinery and equipment manufacturing; and
2.8% for Retail trade.

JPMorgan maintains the view that the RBNZ will keep the OCR unchanged at 8.25% in coming months, as officials gauge the impact of this year's 4 OCR tightenings on economic activity. JPMorgan believes the risk of yet another tightening remains around 30% in this tightening cycle, and the prospect of an OCR rate cut should not be considered until the second half of 2008.

ENDS

(See attached file: NZ_LCI_2Q_6aug07.pdf)

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