Strong labour markets point to tighter policy

Underlying inflation picked up strongly in New Zealand in Q4, with core inflation rising above the mid-point of the RBNZ’s 1-3% target band. That supports our view that the RBNZ will not cut rates further. But we expect strong house price growth and a tightening labour market to support inflation to rise even further in the years ahead. Taken together with our forecast for the solid rise in GDP growth to be sustained and the labour market to tighten before long the outlook is looking solid. We now expect the RBNZ to tighten policy by ending QE later this year before raising rates late next year. Underlying inflation was broadly stable in Australia in Q4 but we expect it to firm up in the months ahead. But the key data outturn has been the remarkable improvement in the labour market with the underemployment rate already back at pre-virus levels. Given the upside surprise in the labour market, we suspect the RBA will not extend its asset purchases in April.