NZ CPI data set to show inflation still subdued in Dec qtr

NZIER principal economist Christina Leung. Picture/Supplied.

Consumers price index (CPI) data out tomorrow looks likely to show that inflation remained low in the December quarter, giving the Reserve Bank little reason to alter its "no change" stance on official interest rates.

Market expectations are for a 0.4 per cent gain in the CPI over the December quarter, making for a 1.9 per cent rise over the year.

Economists said rising fuel prices, housing costs and an ongoing influx of tourists may have pushed annual inflation to the mid-point of the central bank's target 1 to 3 per cent target range.

The central bank said in November that "monetary policy will remain accommodative for a considerable period" but economists agree that the next move in the official cash rate — which currently sits at 1.75 per cent — will be up.

However, they differ greatly on the likely timing.

With few signs of core inflation lifting, ASB Bank expects the Reserve Bank to leave the rate on hold until early 2019.

Kiwibank and the independent NZIER both expect to see rate hikes towards the end of this year.

ANZ sees one rate hike in November, with two more in 2019, while Westpac does not expect to see a hike until late 2019.

At the top end, BNZ expects rate hikes in August and November, followed by three more hikes next year.

Outside domestic factors, there are signs that interest rates globally are on the move, with key US 10-year bond yields rising to 2.65 per cent from 2.40 per cent at the start of the year.

"Globally, there is more conviction that interest rates are on the rise, particularly considering what is going on in the US," Christina Leung, principal economist at NZIER, said.

"Overall, with inflation near the mid point of the Reserve Bank's 1 to 3 per cent range, it should give the Reserve Bank more confidence that the next move in interest rates will be higher.

"So the question is when that will happen," she said.

In the big picture, Leung said she expected mortgage interest rates to be on hold for most of the year.

ASB Bank expects inflation to have lifted 0.5 per cent in the quarter and 2 per cent for the year but said it was largely due to one-off movements, such as a sharp jump in petrol prices.

"A contained backdrop for overall inflation should encourage a period of stability in official cash rate settings," chief economist Nick Tuffley said.

The Reserve Bank is mandated with keeping annual inflation between 1 and 3 per cent over the medium term, with a focus on the mid-point.

However, inflation has remained stubbornly weak, only pushing up to a 2.2 per cent annual rate in the March quarter before dipping back to 1.7 per cent in the June quarter and 1.9 per cent in the September quarter.

The Reserve Bank's next review of the official cash rate is due on February 8.

- Additional reporting BusinessDesk