Labour market data out on this week is expected to show continued strength in the labour market.
Statistics New Zealand will release the labour market data for the three months ended March on Wednesday.
ANZ senior economist Liz Kendall said only gradual improvements were likely in the future.
Employment growth had been volatile recently.
In June 2016, there as a step-change increase in employment as a result of Household Labour Force Survey redevelopment.
Since then, employment growth had been choppy. Looking through the changes, employment had been growing at about 1% quarter-on-quarter — a very strong rate, she said.
Given recent strength, the ANZ expected employment growth was due for a weaker quarter. The bank was picking a 0.3% increase which would mean annual growth pulling back to 3% annually from 3.7%.
The lower rate was consistent with some softening in near-term indicators since mid-2017, Ms Kendall said.
"Over the medium term we expect employment growth will remain robust but slow gradually. Capacity constraints in the broader economy will limit future increases."
The participation rate was expected to be flat in the March quarter, remaining at its current elevated level.
The labour force was likely to have increased 0.5% as a result of continued strong growth in the working-age population which had increased 2.3% in the past year.
Strong growth in the labour supply would continue to be a feature of the labour market as "very strong" migration inflows were slowing only gradually, she said.The unemployment rate was expected to remain steady. The rate was 4.5% in December, consistent with a tight labour market. ANZ expected a modest increase to 4.6% in March but the forecast was in the context of gradually going lower.
As economic growth was expected to grow at about trend, and not above, falls in the unemployment rate were expected to remain modest in the medium-term.
"In this environment, we think it will be difficult for the unemployment rate to go below 4%. Our expectation is the unemployment rate will fall to 4.1% in mid-2019 — consistent with further tightening in the labour market."
However, wage inflation was expected to remain modest, Ms Kendall said.
Although it was subdued, wage inflation had increased in the past year from 1.5% annual in March last year to 1.9% in December.
The Labour Cost Index private sector wage inflation was expected to be stable at 0.4% in the quarter, meaning annual wage inflation would move up to 2%.
The Quarterly Employment Survey private sector hourly earnings were likely to soften to 0.5% in March, from 0.8% in December. Annual growth would still increase to 3.5% from 3.1%, she said.
A tight labour market and capacity pressures expected to continue building, conditions were in place for wage inflation to increase further. The question was when?
Labour market data released this week predated the rise in the minimum age on April 1, which would boost wages in the second quarter and have a minimal impact on employment, Ms Kendall said.
Over and above that, Government policy might provide a catalyst for broad-based wage increases in time as the annual minimum wage increased along with expected industrial relations reform.
The Reserve Bank would become more focused on labour market data, given it was moving to a dual-style mandate.
"The story remains the same. The economy and the labour market are performing well but price and wage inflation are elusive."
Although the economy was arguably near "maximum sustainable employment", inflation remained well below the mid-point of the Reserve Bank’s 1% to 3% target band, she said.
"The Reserve Bank will remain cautious until it sees a definitive broadening in inflationary pressures. The official cash rate will remain on hold for some time yet."
