WELLINGTON (Reuters) - New Zealand's jobless rate unexpectedly dropped to 10-year low on Wednesday, a shock result that sparked a rally in the local currency and boosted bond yields to multi-month highs as any chance of a rate cut evaporated.
Some economists suggested statistical 'noise' was behind the stellar report, which comes a day before the Reserve Bank of New Zealand's (RBNZ) policy decision when it is widely expected to keep the official cash rate at 1.75 percent - a level retained since November 2016.
While a near term rate hike is still out of the question, recent upside data surprises including third quarter economic growth numbers might see policy makers adopt a more optimistic view on the economy.
The unemployment rate dropped to 3.9 percent over the previous quarter, well below the 4.4 percent rate recorded in the last quarter, and is the lowest since the June 2008 quarter, when it was 3.8 percent. Nevertheless, annual wage growth remained a relatively modest 1.9 percent.
Economists polled by Reuters had forecast an unemployment rate of 4.5 percent.
The New Zealand dollar <NZD=D4> rallied more than 1.1 percent against the dollar to a three-month high of $0.6740 as markets wiped out any chance of a rate cut and started focusing on the prospects of a hawkish turn in RBNZ policy.
Yields on two-year New Zealand bonds <NZ2YT=RR> shot to 1.95 percent, the highest since early June while 10-year bond yields <NZ10YT=RR> climbed to a three-month peak of 2.778 percent.
"While we are inclined to be a little wary of noise in the data, there is no question that this adds to the weight of evidence that suggests that the RBNZ has breathing room with the OCR," ANZ Senior Economist Liz Kendall said in a note.
RBNZ has said it expected to keep the OCR at current levels through 2019 and into 2020, as inflation continued to hover under the central bank's target mid-point of 2.0 percent.
While the central bank took a more dovish tilt at its August review and sparked speculation of a possible near term rate cut, it changed tack in the last meeting in September with a slightly more upbeat statement on the economy.
"The dramatic fall in the unemployment rate in the third quarter suggests that the Reserve Bank...may not wait until 2021 before raising rates," said Ben Udy, Singapore-based economist for Capital Economics.
GROWING EMPLOYMENT
The employment growth rate in the quarter more than doubled to 1.1 percent, from 0.5 percent in the previous quarter, the same level predicted by economists.
In a statement, Statistics New Zealand acknowledged the volatility in the data series, but also said that a tight labour market can lead to low unemployment, and noted that employment grew in major centres like Auckland.
The drop in the unemployment rate came despite an uptick in the labour participation rate, which has climbed to 71.1 percent from 70.9 percent in the previous quarter, the data showed.
Wage inflation has been tepid in recent years even as employment has grown. Quarterly wage growth slowed to 0.5 percent in the third quarter from 0.6 percent in the previous quarter.
"The next move in the OCR is likely up, but not until concrete signs of firming wage inflation emerge, which looks to be 2020," ASB Chief Economist Nick Tuffley said.
(Editing by Michael Perry & Shri Navaratnam; Additional reporting by Swati Pandey in SYDNEY)
