(Bloomberg) -- New Zealand’s labor market was a touch softer than expected in the fourth quarter, suggesting the central bank could slow the pace of its interest-rate hikes.

The jobless rate ticked up to 3.4% against expectations it would hold at 3.3%, while quarterly employment growth of 0.2% missed the 0.3% estimate, data from Statistics New Zealand showed Wednesday in Wellington. Wage inflation accelerated, but some measures of labor costs eased. 

An acute labor shortage has been fueling price pressures as employers lift pay rates to retain workers and even offer sign-on bonuses to attract new hires. The Reserve Bank is raising rates at record pace and predicts the economy will enter a recession this year, which may see the labor market soften.

“We look to be at or close to a turning point for the labor market,” said Mark Smith, senior economist at ASB Bank in Auckland. “The labor market remains tight, and worker shortages widespread, but firms are now signaling they will be scaling back hiring as the economy slows.”

RBNZ Rates

That may pave the way for the RBNZ to slow the pace of its rate increases. The bank’s next policy meeting is on Feb. 22, and most economists now predict it will revert to a 50 basis-point hike rather than repeat the 75-point move it delivered in November.

The New Zealand dollar fell, buying 64.30 US cents at 11:50 a.m. in Wellington from 64.63 cents immediately before the release of the jobless numbers. Investors now see almost no chance of a 75-point hike from the RBNZ this month, swaps data show.

The bank has lifted the Official Cash Rate by four percentage points since October 2021, taking it to 4.25%. In its most recent forecasts in November, it predicted the unemployment rate would drop to 3.2% in the fourth quarter, which would have matched a record low.

Economists at Bank of New Zealand and ASB lowered their cash rate forecasts in the wake of the labor market report.

Lower Peak

The figures “were slightly on the softer side of our, and more importantly, the RBNZ’s expectations so we are responding accordingly,” BNZ Head of Research Stephen Toplis said. 

He now expects the cash rate to peak at 5% instead of 5.5%, but said the RBNZ won’t start cutting rates until 2024.

New Zealand closed its border to foreigners for more than two years during the pandemic, cutting the supply of migrant workers many industries rely on. Now they’re struggling to fill positions and meet demand for goods and services.

The 4.3% annual rise in ordinary time wages for non-government workers was the highest since the data was first published in 1993, the statistics agency said, citing the Labour Cost Index. Still, the measure rose 1.1% from the previous quarter, less than the 1.2% gain economists expected.

Average ordinary time hourly earnings for non-government workers gained 0.9% from the previous quarter, while the annual increase slowed to 8.1% from a record 8.6%.

Annual employment growth was 1.3%, up from 1.2% in the third quarter but less than the expected 1.5%.

(Updates with economists’ comments from fourth paragraph)

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