Inflation expected to have slowed in third quarter

New Zealand inflation is expected to have slowed in the third quarter, keeping the annual rate below the Reserve Bank's target band for a fourth straight quarter and giving the bank more reason to cut interest rates again as soon as this month.

The consumers price index fell to 0.2% in the third quarter from 0.4% three months earlier, according to a Reuters survey. The annual rate may also have slowed to 0.2%, the figures scheduled for release next Friday are expected to show.

Annual inflation hasn't been within the central bank's 1-3% target range since the third quarter of last year, when it scraped in at 1%. The bank cut the official cash rate a quarter point to 2.75% at the September 10 monetary policy statement and next reviews rates on October 29, before the next full Monetary Policy Statement on December 10.

Helping keep a lid on consumer prices in the third quarter was the Accident Compensation Corp's change to "vehicle risk ratings" to calculate ACC motor vehicle levies on July 1, reducing the levy portion of vehicle registration by $40-170. Subsidised doctor visits would also weigh on inflation. Against that was a hike in local authority rates, especially in Auckland and Wellington.

"New Zealand's run of very subdued inflation is likely to continue with next Friday's release of the September quarter CPI figures," said Michael Gordon, senior economist at Westpac Banking Corp. He is forecasting inflation of just 0.1% in the third quarter for an annual 0.2% rate, "which we think will mark the low point of this cycle."

There is a 78% chance of a cut to the OCR on October 29, based on the overnight interest swap curve, with a total 38 basis points of reductions seen over the next 12 months. Westpac doesn't expect a cut this month, given the recovery in dairy prices, but ASB Bank economists "marginally favour October ahead of the CPI" although saying it is a close call whether the Reserve Bank waits until the full MPS in December. Either way, ASB says deeper cuts may be needed to the OCR to nudge inflation back within the Reserve Bank target.

"Although reduced vehicle registration fees are a one-off pushing inflation down, the broader picture is still one of muted inflation pressures," said ASB chief economist Nick Tuffley. "Looking ahead to 2016 and 2017, we think inflation will struggle to sustain a pace close to 2% at an OCR setting of 2.5%. In particular, we are sceptical that tradable inflation will be anywhere near as strong as the Reserve Bank is banking on off the back of the fall in the New Zealand dollar."

The trade-weighted index fell as low as 68.08 in late September from as high as 72 a month earlier, and has since recovered to be at 71.60 recently.

Mr Tuffley estimates the cut to vehicle registration fees will shave about 0.25% off inflation. Against that, increases in council rates, led by gains of almost 10% in Auckland and Wellington, seasonal increases in food and vegetable prices and rising construction costs will contribute to rising prices, he said. The food price index for September, the last piece of data to be added to the September quarter CPI, is due for release on Tuesday.

Westpac's Mr Gordon also expects competition for domestic flights, with the return of Jetstar to some regional routes, will contribute to a drop in passenger transport prices in the third quarter.

(BusinessDesk)