Stalled inflation opens door to interest rate cut

The annual pace of non-tradables inflation slowed to 1.5 per cent from 2 per cent.

Domestic, or non-tradables, inflation, stalled in the third quarter and is expected to remain subdued, leaving the door open for further Reserve Bank interest rates cuts.

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

The annual pace of inflation was unchanged at 0.4 per cent, slightly above the Reserve Bank's forecast and economists' expectations.

Non-tradables inflation, which covers domestic goods and services, was zero in the quarter - the lowest level since March 2001 - after rising 0.1 per cent in June.

The annual pace of non-tradables inflation slowed to 1.5 per cent from 2 per cent, its lowest increase since December 2001.

Last month, the Reserve Bank said it expected 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 to fall below 1.5 per cent on an annual basis late this year. The bank expected low interest rates and a depreciating kiwi dollar to stoke a revival domestic demand next year, helping lift the measure of domestic inflation to 2 per cent in 2018.

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

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

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

"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 per cent official cash rate at the October 29 review, but expects a reduction in December.

Turner said ASB Bank saw more downside risks to the local inflation outlook over the next two years than the Reserve Bank, which might put pressure on Wheeler to cut rates further.

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

Annual inflation hasn't been within the central bank's 1 per cent-to-3 per cent target range since the third quarter of last year, when it scraped in at 1 per cent, as a strong kiwi dollar, cheap oil and low interest rates kept a lid on consumer prices.