Interest rate move a cliffhanger

Whether Reserve Bank Governor Alan Bollard will raise the official cash rate today remains a line-ball call, economists say, despite a drop in the inflation rate in the September quarter.

The consumer price index rose 0.7 per cent, making 3.5 per cent for the year. That is down from the June quarter's 1.5 per cent and 4 per cent respectively, but such comparisons are of limited value as Statistics New Zealand has just re-based the index, dropping some items and adjusting the weight given to others.

On the old weightings the quarter's increase would have been 0.9 per cent, it said, which is only 0.1 per cent less than the bank had forecast.

The money markets were rating the chance of an OCR hike today at 50:50 yesterday, according to Credit Suisse's swaps-based indicator.

The data provides supporting evidence both for those who expect Bollard to hike again and for those who believe he will stay his hand.

On the one hand, non-tradables inflation remains stubbornly high, up 1 per cent for the quarter as it has been for the past four quarters, making an annual rate of 4 per cent.

On the other hand, non-tradables inflation is trending lower on an annual basis, albeit slowly.

Tradables inflation - those items whose price is affected by the exchange rate or disciplined by international prices, such as meat - rose only 0.3 per cent. Yet again the New Zealand dollar has done the bank's dirty work, but the question for Bollard is for how much longer it will.

However, the lower headline rate, and the prospect of lower rates still as the drop in petrol rices and the resurgent dollar flow through, should reduce the risk of self-fulfilling higher inflation expectations.

Price rises were more widespread than in the June quarter by number, but less widespread when adjusted for the relative proportion of household spending they represent, and on average the rises were smaller too.

A measure of core inflation, the trimmed mean that disregards unusually large price movements, rose only 0.5 per cent in the quarter compared with 1.1 per cent in June. But the annual increase was an uncomfortable 3.3 per cent, the highest for six years.

Of the 11 groups the statisticians divide the CPI into, six posted increases, the largest being housing and household utilities, which rose 1.9 per cent in the quarter.

Most of that is explained by the annual increase in local body rates and relentless rise in electricity prices, but construction costs jumped 2.1 per cent, making 6.2 per cent for the year.

"That's the last thing the Reserve Bank wants to see at this stage of the cycle," said First NZ Capital economist Jason Wong.

Offsetting that, and reflecting the higher kiwi dollar, prices for used cars fell 4.6 per cent and new cars 2.6 per cent. Major household appliances and audio-visual equipment were cheaper.

But petrol prices only recorded a 0.8 per cent drop.

Most of the recent fall will enter the statistics in the December quarter, which has some economists forecasting no rise in the CPI and a drop below 3 per cent in the annual inflation rate.

Even so, the inflation risks at this point were still upwards, ANZ National Bank chief economist Cameron Bagrie said.

There were tentative signs the housing market was maintaining its momentum and recent mortgage rate discounting among the banks had reduced the "pipeline" interest rate rise the Reserve Bank was counting on as a bulge of fixed-rate borrowers face mortgage rate resets. And the labour market remained tight, he said.

Inflation eases

* The inflation rate fell to 3.5 per cent from 4 per cent three months ago.

* However, the high New Zealand dollar did the work.

* Non-tradables inflation remains stubbornly high.

* This leaves the Reserve Bank's next move too close to call.