Signs of two-tier economy emerging

If anyone is looking for reasons why the Reserve Bank should remain on high alert, yesterday's migration data provided the justification.

Statistics New Zealand data showed net migration was at a 10-year high in the year ended May.

Monthly net migration, while down slightly on April, was still strong in May.

Net migration is easing only because the Australian job market has stopped getting worse.

The latest monthly number is still the second-highest since April 2003.

Net migration received considerable attention in the Reserve Bank's June Monetary Policy Statement when it increased official interest rates to 3.25%.

The central bank caught the market by surprise by adopting a hawkish view, indicating interest rates could again rise next month instead of the expected pause.

It is now expected the official cash rate will be at 3.75% by the end of the year to reach a peak of either 4.5% or 5%, depending to which economist you listen.

May's result was stronger than the Reserve Bank was expecting.

It was forecasting annual migration of those aged 15 and over to reach 33,000 in the June quarter but the number for May was already above 34,000.

Along with recent strong consumer confidence and economic growth, the migration data was another tick for a follow-up rise in the OCR next month.

The BNZ says the annualised net monthly inflow indicates a peak of 48,000 people arriving this year.

But the bank also believes the peak has been reached, although it will be a while before it falls sufficiently to take pressure off domestic demand.

New Zealand's economy is going gangbusters but there will continue to be a down side.

The high net migration means employment will remain tight and unemployment will fall only slowly as migrants compete with locals for new jobs.

Salaries and wages will continue to rise slowly because of the competition for jobs.

House prices in Auckland and Christchurch will affect the rest of the country because the Reserve Bank will continue to push up interest rates, taking some steam out of those two markets but at the same time hurting sales in areas like Dunedin, Timaru and Invercargill where housing pressures are not evident.

New Zealand is close to becoming a nation with a two-tier economy.

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