Century high immigration keeping New Zealand inflation in check

The biggest wave of immigration in a century has helped drive New Zealand's economic growth over the last four years, but it has also kept a lid on wage growth and inflation, according to the Reserve Bank of New Zealand (RBNZ).

"In recent years, the main driver of population growth has been immigration, which is running at its highest rate for a century," RBNZ deputy governor Geoff Bascand said in a published speech at Otago University, in the South Island city of Dunedin, Thursday.

"Net immigration has added about 130,000 people (3.5 percent) to the working age population in the past three years, and is projected to add a further 120,000 by 2018." Recent low consumer price inflation could be mostly explained by falls in commodity prices and the high New Zealand dollar, but the higher productive capacity of the economy from rapid growth in the labor force also explained some of the weakness in inflation.

"Over the past four years New Zealand's population has grown by a quarter of a million people, with over half that number coming from net migration. The economy has expanded steadily since 2011 and created 180,000 extra jobs, but the unemployment rate has declined only modestly," Bascand said.

The surge in migration had contributed to housing and consumer demand and job growth, but without the inflation pressures that accompanied the previous wave. Because migrants increased overall spending in the economy and also increased the labour supply, the net effect on inflationary pressures can be ambiguous.

"Much of the current surge in migration is explained by weakness in the Australian and world economy that has made New Zealand a relatively more attractive place to live. Because our labor supply has increased at a time when businesses are facing lower world demand, it results in lower wage and inflationary pressures," said Bascand.

A key driver of wage growth was the balance of supply and demand in the labor market. Supply and demand in the labour market had broadly been in balance since early 2014, creating little upward pressure on wages.