The jobless rate in New Zealand increased less than forecast in Q2 as the country’s economy unexpectedly increased its workforce even though the outlook was less optimistic.

According to Statistics New Zealand, unemployment increased to 4.6% from a revised 4.4% in Q1, as reported on Wednesday in Wellington.

Economists had anticipated a rise to 4.7%.

Employment grew by 0.4% compared to the previous three months, surpassing the projected 0.2% decrease, while annual wage inflation continued to slow for the fifth consecutive quarter.

Following the report, the New Zealand Dollar surged as traders reduced their expectations for an interest rate cut by the central bank as early as next week, Bloomberg reports.

Although the jobless rate remains at its highest level in over three years, it indicates that inflation may fall back within the Reserve Bank’s 1-3% target range in the coming quarters, potentially allowing policymakers to start reducing rates sooner than previously indicated.

“Today’s jobs report was weak, although it was slightly better than we and the market consensus had predicted. The labour market has been remarkably resilient over the past two years of restrictive interest rates. But it’s important for the RBNZ (Reserve Bank of New Zealand) to stay ahead of any further labour market slowing by proceeding with rate cuts sooner rather than later,” said Mary Jo Vergara, senior economist at Kiwibank in Auckland.

The Reserve Bank of New Zealand has maintained the Official Cash Rate (OCR) at 5.5% since May 2023. 

After indicating a tightening stance just three months ago, the bank acknowledged signs of slowing economic activity in July.

Since then, indicators revealed that both the manufacturing and services sectors in New Zealand fell further into contraction in June, while inflation slowed more than anticipated, dropping to 3.3% in Q2.

Furthermore, annual employment growth in the country was 0.6%, surpassing the no-growth forecast by economists but still slower than the revised 1.3% growth recorded in Q1. The participation rate increased slightly to 71.7% from 71.6%. 

“The labour market looks set to significantly weaken from here and this could cause longer-term economic damage if the RBNZ maintains as much pressure on the monetary policy brakes as it does currently. In our view, the regret from holding the OCR at 5.5% for too long and causing longer-term economic damage now outweighs the risk of inflation failing to settle below 3%,” stated senior economist at ASB Bank in Auckland, Mark Smith.