The Reserve Bank could lift interest rates on March 6 in response to unemployment falling to a 25-year low.
A second rate rise could come in September as increased wage pressure follows employers' finding they have to pay more to attract people to jobs.
The unemployment rate fell to 3.4% in December, and Westpac chief economist Brendan O'Donovan was the only person to pick the falling rate. The market expected a rise from 3.5% to 3.6%.
Mr O'Donovan yesterday said Statistics New Zealand's household labour force survey data was strong, no matter which way it was examined.
Employment rose a ‘‘whopping'' 1.1%, making September's fall a distant memory. ‘‘More people joined the labour force but this wasn't enough to stop the unemployment rate falling to 3.4% as we predicted. This is the lowest rate since the survey began in 1986.
Longer-run unofficial data suggests the unemployment rate is now at a 25-year low.''
Employment was focused in full-time work, unlike the trend of recent quarters, he said.
That suggested the strong employment numbers should provide economic growth with a good kick. Male employment fell 0.2% but female employment rose a ‘‘stunning'' 2.6% through the quarter, entirely due to an increase in full-time employment.
Employment growth was broadly based over sectors but was particularly strong in the wholesale and retail trade and business and financial services sectors, which had each shown employment growth of more than 5% in the past year.
In Otago, unemployment fell to 2.9% but the regional winner was Southland with a rate of 1.6%. The national participation rate rose to 68.8%, reversing last quarter's fall.
In line with the employment data, the increase was entirely driven by women joining the labour force, restoring a long-term trend that had been threatening to flatten out in recent quarters.
Mr O'Donovan said it was his view that the Government's Working for Families policy had discouraged women to work. However, growing pressure on household budgets and some tempting wage growth seemed to be luring them back in great numbers.
At 62.4%, it was the highest female participation rate since the survey began.
The Reserve Bank was anticipating an unemployment rate of 3.5% and the result yesterday represented a surprise regarding the tightness of the labour
market, he said.
‘‘More importantly, the Reserve Bank is unlikely to have predicted anything like 1.1% employment growth. We estimate they were probably anticipating something closer to 0.6%.''
The data corroborated both the quarterly survey of business opinion and this week's rampant wage-growth data in suggesting the New Zealand labour market was ‘‘tight as a drum'', Mr O'Donovan said.
Westpac remained comfortable with its call the Reserve Bank would have to lift the official cash rate twice more this year to contain inflation unless growth in Asia and Australia looked like taking a significant hit from United States developments, he said.
Council of Trade Unions secretary Carol Beaumont said record low unemployment figures were good news and enabled a renewed focus this year on supporting those in work to lift skills. It was also an opportunity to try to go even lower than the 3.4% unemployment rate.
The CTU would continue its call for decent work for all New Zealanders, which addressed issues around work-life balance, better pay, productivity and secure hours, she said.
There were still 77,000 people out of work. Once those discouraged or unable to work were added, the figure rose to 146,000, she said.
