KEY POINTS:
Tomorrow's release of the consumers' price index for the September quarter is unlikely to make good bedside reading for borrowers.
Economists expect the index to show inflation rose 0.8 per cent over the quarter, and by 2.1 per cent over the September year, compared with gains of 1.0 per cent and 2.0 per cent, respectively, for the June quarter and June year.
The annual outcome will be within the Reserve Bank's 1-3 per cent target range but the number, like those midway through the year, will be artificially low because of the December 2006 quarter, in which inflation fell by 0.2 per cent because of a sharp fall in oil prices.
Once that quarter drops out of the equation, the annual rate is expected to threaten the top end of the target range, so many economists are expecting the CPI to hit 3.0 per cent for the 2007 calendar year.
The Reserve Bank has raised interest rates four times this year to try to quell inflationary pressures, notably in the overheated real estate sector, but the full impact of those hikes is unlikely to be felt for some time yet.
News out on Friday that seasonally-adjusted retail sales rose 0.2 per cent in August, which was below market expectations, was an indication that the hikes may be starting to bite into spending patterns.
Darren Gibbs, chief economist at Deutsche Bank NZ, expects food, housing and petrol prices to drive the index over the September quarter, and that the core rate of inflation will remain high.
Some banks are suggesting that the Reserve Bank is going to have to raise rates again some time next year, but Gibbs and others disagree.
"I don't think that's going to happen, but I certainly do believe that rate cuts are a long, long way off," Gibbs says. "High interest rates were designed to basically nobble the housing market.
"You can clearly see in the last few months that that has happened, so I am not quite sure what would be achieved by taking interest rates higher again."
The effects of the weakness in the housing market will take time to permeate through to the broader economy.
But Gibbs adds: "If we were to see any signs at all that the housing market lull through the winter was beginning to give way to even moderate strength through the spring, then the risk of further rate hikes would certainly go up pretty rapidly."
Goldman Sachs JB Were economist Shamubeel Eaqub says the focus will be on the non-tradeables or domestic side, particularly construction costs, home purchasing costs, food price inflation, and utility and local government charges.
He agrees that interest rate cuts are some way off.
"We think that growth has to fall pretty quickly and that has to be reflected in inflation numbers early next year for the Reserve Bank to ease rates," he says.
Most economists are predicting cuts will take place in the second half of 2008.
