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New Zealand's first quarter employment data out on Wednesday showed unemployment had risen as the participation and employment rate also grew, providing the central bank with a quandary of a strengthening economy with subdued wage inflation.
New Zealand's unemployment rate rose to 5.7 percent in the first quarter, Statistics New Zealand said. The participation rate jumped to 69.0 percent while employment rose 1.2 percent.
Economists polled by Reuters had forecast an unemployment rate of 5.5 percent and employment growth of 0.7 percent.
Despite the lift in unemployment, the data suggested the economy was performing well, analysts said.
"The [unemployment] lift in the quarter was entirely the result of strong participation, which is an encouraging sign," said ANZ analysts in a research note.
Wages, however, were not keeping up with labour market growth, a factor that would drag on inflation.
"We're seeing this strong employment growth but we're not seeing the pressure on wages that we might expect to see in normal circumstances," said Anne Boniface, senior economist at Westpac.
Private sector wages grew a quarterly 0.4 percent and had annual growth of 1.8 percent.
The Reserve Bank of New Zealand has flagged modest wage growth as a challenge in an already low-inflation environment.
The central bank is now forecasting annual inflation at 1.1 percent by end-2016, down from the projection of 1.6 percent made at its December policy review, and just inside its 1 percent to 3 percent target band.
Deputy Governor Geoff Bascand said last month that strong labour supply spurred by net immigration was a factor in the RBNZ's accommodative monetary policy.
"Unexpectedly strong growth in labour supply, along with the characteristics of the migration cycle, substantially explains why wage and non-tradables inflation pressures have been weaker than expected," he said.
Of 12 economists polled following last week's decision to hold rates at 2.25 percent, 11 expect the central bank to cut rates to 2.00 percent at the June 9 policy review while one expects rates to remain on hold.
"I don't think today's data pushes us away from a rate cut in June," said Boniface.
