UPDATE: Absence of domestic inflation provides scope for more rate cuts

UPDATED: Domestic inflation, stalled in the third quarter, and is expected to remain subdued, leaving the door open for further interest rates cuts by the Reserve Bank.

The consumers price index increased 0.3% in the three months ended September 30, meeting the Reserve Bank's forecast last month, and slowing from a pace of 0.4 % in the June quarter, Statistics New Zealand says.

The annual pace of inflation was unchanged at 0.4 %, slightly ahead of the central bank's forecast and economists’ expectations.

Non-tradables (domestic) inflation, which covers domestic goods and services, was zero in the quarter, after rising 0.1% in June, and the lowest level since March 2001. The annual pace of non-tradables inflation slowed to 1.5% from 2%, its smallest increase since December 2001.

Last month, the Reserve Bank says it expects non-tradables inflation to fall in the near-term to "historically low levels" reflecting one-off factors such as a cut in Accident Compensation Corporation car levies, and falling below 1.5% on an annual basis late this year.

The bank expects low interest rates and a depreciating kiwi dollar to stoke a revival in domestic demand next year, helping lift the measure of domestic inflation to 2% in 2018, still below the historical average.

ASB Bank senior economist Jane Turner says the non-tradables figure was in line with the Reserve Bank's expectations, which was prepared for the ACC levy reduction, which drove a 24% drop in the price of private transport services, and increased general practitioner subsidies that contributed to a 2.6% decline in the price of out-patient medical services.

Prices for newly built housing rose 1.6%, and were up 5.5% on the year, a trend which Ms Turner says will continue to provide upward price pressure with elevated building activity in Canterbury and Auckland set to push up construction costs.

"What is concerning is the underlying trend in non-tradables inflation has slowed considerably over 2015, and this is the component the Reserve Bank is supposed to have more influence on," Ms Turner says.

"Looking ahead, we are expecting growth to slow over the next year, and we don't see what's going to pick up that core non-tradables inflation pressure without further stimulus."

ASB expects RBNZ governor Graeme Wheeler will hold off cutting the 2.5% official cash rate at the October 29 review, but still anticipates a reduction at the full December monetary policy statement.

Ms Turner says the ASB sees more downside risks to the local inflation outlook over the next two years than the Reserve Bank which might put pressure on Mr Wheeler to cut rates further.

"Clearly the Reserve Bank is still worried about having some ammo saved up if the global outlook deteriorates," she says.

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%, as a strong kiwi dollar, cheap oil and low interest rates kept a lid on consumer prices.

Mr Wheeler this week said more rate cuts are likely, depending on the emerging flow of data, although he's also wary of stoking demand in the housing market by contributing to cheaper borrowing costs.

Non-tradables inflation has replaced the tradables component, which measures price movements for goods and services that do face international competition, in weighing on consumer prices after a sharp drop in the kiwi dollar through the middle of this year.

Tradables inflation rose 0.7% in the quarter, slowing from a 0.9% rate three months earlier. On an annual basis, prices for tradable goods fell 1.2%, compared to a 1.8% decline in the June year.

(BusinessDesk)