'Easing' inflation still above bank's target

The inflation rate for the December quarter is likely to have eased slightly, but would still be above the Reserve Bank's target range, economists say.

The Reserve Bank has a mandate to keep annual inflation within 1 per cent to 3 per cent, on average over the medium term but that was breached in the September quarter.

Economists have a median forecast of a 0.8 per cent rise in CPI for the December quarter, which would see the annual rate of inflation at 3.2 per cent.

The forecast is slightly lower than the bank's forecast of a 0.9 per cent rise in the December quarter, which would maintain annual inflation at 3.4 per cent.

Inflationary pressures have been one of the key drivers behind the bank's nine rate rises since the start of 2004.

Despite clear signs of an economic slowdown and plenty of talk from economists of a "hard landing", the central bank raised the official cash rate (OCR) by another 25 basis points to 7.25 per cent last month and refused to rule out more increases.

The Reserve Bank meets again on January 26, with most economists tipping it to keep rates steady as the economy shows signs of slowing.

ASB chief economist Anthony Byett said the central bank's mandate to keep inflation under 3 per cent in the "medium term" gave it some flexibility to withstand temporary breaches.

But it would still be concerned that inflationary pressures could continue to fuel wage growth, he said.

ASB is tipping December quarter CPI growth above the median expectation, at 1 per cent.

Economists expected most sectors to have made positive contributions to price inflation during the December quarter. But easing petrol prices during the period, which fell an estimated 3.9 per cent on the previous quarter, were expected to have put some downward pressure on the CPI.

With petrol prices on the rise again this month, the outlook for the first quarter of 2006 is for CPI growth to remain strong.

Darren Gibbs, chief economist at Deutsche Bank, is picking a 0.7 rise in the March quarter, which would nudge the annual inflation rate back to 3.4 per cent.

Westpac economists said the annual inflation rate could rise to 3.5 per cent for the first part of this year.

The Reserve Bank is forecasting that annual inflation will average 3.5 per cent this year, falling to 2.75 per cent next year. The December CPI data will be released on Wednesday.

- NZPA