WELLINGTON – New Zealand’s unemployment rate is projected to remain near a decade-high as geopolitical volatility in the Middle East disrupts preliminary signs of economic recovery.
The convergence of stagnant labor demand and persistent inflationary pressures has heightened the risk of stagflation, complicating the monetary policy trajectory for the Reserve Bank of New Zealand (RBNZ).
Economists from major banking institutions expect the unemployment rate to hold at 5.4% or increase slightly for the quarter ending March. This trend reflects a broader volatility in labour market participation and a tightening of corporate hiring intentions across the private sector, with firms increasingly reluctant to commit to permanent headcount growth.
ASB, a subsidiary of the Commonwealth Bank of Australia, indicates that while current data largely reflects the market state prior to the Middle East conflict, a combination of an expanding workforce and increased demand for employment will likely exert upward pressure on headline figures.
“[The] labour market data is expected to reflect a firming employment trend and strong labour supply response, but headline numbers will likely remain weak. This is expected to push the unemployment rate up to 5.5%. Labour cost growth should remain modest,” said ASB economist Wesley Tanuvasa, adding that weaker hiring sits uncomfortably alongside still‑elevated living costs for households.
Govt grasps for positive signs in figures much worse than forecast by economists and the Reserve Bank (Source: 1News)
The volatility of these figures is often attributed to the statistical composition of the workforce, where shifts in training, participation rates, and the number of active job seekers can alter the unemployment percentage regardless of net job creation. For policymakers, that makes it harder to separate cyclical weakness from structural changes in the labour market.
BNZ, owned by National Australia Bank, notes a decline in business confidence as evidenced by the Institute of Economic Research’s quarterly survey (QSBO). This slide in confidence is translating into a reduction in hiring intentions and a greater focus on cost-cutting rather than expansion.
BNZ economist Matt Brunt noted that the latest QSBO showed a softening in hiring, with responses deteriorating toward the end of the month. These trends are consistent with net labour shedding, leading BNZ to project that unemployment could reach 5.8% later this year if current conditions persist.
Monetary Policy and Stagflationary Risk
The economic outlook is currently clouded by the threat of stagflation-a condition characterized by slow economic growth, high unemployment, and high inflation. For governments, this combination is among the hardest to manage, as conventional stimulus can fuel further price rises while tighter policy risks deeper job losses.
The Middle East conflict introduces supply-side shocks, particularly regarding energy costs, which can drive inflation higher even as economic activity slows. This creates a policy dilemma for the RBNZ, which must balance the need to curb inflation without exacerbating the unemployment crisis or triggering a sharper downturn in interest‑sensitive sectors such as housing and construction.
“We do not envisage a labour market recovery unfolding until 2027 and cite heightened stagflationary risks over 2026 given higher near-term unemployment and higher near-term inflation.”
While the RBNZ no longer operates under a specific mandate to maximize employment, labour market health remains a critical metric in its broader economic assessments under New Zealand’s formal monetary policy framework, set out in the Reserve Bank of New Zealand Act 1989. Within that framework, the central bank is required to maintain price stability and contribute to long‑term economic wellbeing, objectives which are now being tested by overlapping domestic and global shocks.
Tanuvasa stated that the central bank faces a difficult decision regarding the timing of interventions to dampen conflict-driven inflation and the subsequent negative impact that higher interest rates may have on the domestic economy and on government ambitions to support jobs and incomes.
“[This] makes the trade-offs of monetary policy significantly more complex and painful for the economy. There are few, if any, winners in a situation like this,” Tanuvasa said.
Unemployment hit a 10-year high at the end of 2025 as the scramble for vacancies continues. (Source: 1News)
The RBNZ utilizes the Official Cash Rate (OCR) to influence inflation and economic activity, with changes in the OCR filtering through to mortgage rates, business lending, and ultimately household spending. Current market expectations for the next policy meeting are as follows:
- Short-term probability: 40% chance of a 25 basis point increase to 2.5%.
- Majority forecast: A series of rapid increases beginning in September.
- Year-end target: Projections suggest the OCR will reach 3% by the end of the year.
The RBNZ is scheduled to meet in three weeks to determine the next movement of the official cash rate, a decision that will be closely watched in Wellington and across the regions as the government weighs how to respond to a labour market under increasing strain.
