Inflation comes in flat - OCR tipped to stay low

Lower than expected inflation stats out today mean interest rates are likely to stay lower, for longer. Photo / NZME

New Zealand inflation was steady in the third quarter of the year, slowing the annual pace of price increases, and raising the prospect of interest rates staying lower for longer after the data fell short of expectations. The New Zealand dollar fell.

The consumers price index was unchanged at 0.3 per cent in the three months ended September 30 from the second quarter, for an annual pace of 1 per cent, according to Statistics New Zealand.

The quarterly pace was lower than the 0.5 per cent expected in a Reuters survey of economists, and below the Reserve Bank's 0.7 per cent forecast, opening up the possibility governor Graeme Wheeler will delay the resumption of hiking interest rates. The annual pace slowed from 1.6 per cent in the second quarter, and was only just with the central bank's target band of between 1 and 3 per cent.

"New Zealand looks ripe for an inflation blow out but the global environment is, fortuitously, conspiring against this," Bank of New Zealand head of research Stephen Toplis said in a note before the release. "Taking all things into consideration, we have thus lowered both our short and medium term inflation forecasts."

BNZ expected the annual pace of inflation to be 1.2 per cent this quarter, and economists have been preparing to push out their interest rate expectations on the prospect of tepid inflation.

The New Zealand dollar dropped as low as 78.64 US cents from 79.09 cents immediately before the 10:45am release. It was recently trading at 78.73 US cents.

Today's data showed cheaper household contents and services and communication kept a lid on inflation, while food prices, which account for about 19 per cent of the CPI, were flat in the quarter.

Prices of household contents and services fell 1.3 per cent in the quarter for an annual decline of 0.4 per cent. Retailers increased discounting of furniture and furnishings, carpets, and small household appliances in the quarter.

Communication prices fell 1.4 per cent, led by a 7.5 per cent drop in prices for telecommunications equipment, which were down almost 25 per cent on the year.

Prices for housing and household utilities rose 1 per cent in the quarter for an annual increase of 3.4 per cent. New housing prices rose 1.1 per cent in the three month period, for an annual increase of 4.8 per cent, largely driven by booming property markets in Auckland and Christchurch.

House price inflation has been a major concern for the Reserve Bank, which last year imposed restrictions on low-equity home loans to try and quell demand and delay interest rate hikes, with a lack of supply in Auckland and the Canterbury rebuild seen as threatening to spill over into broader consumer price increases.

Read the Consumers Price Index statistics for the September 2014 quarter here:

The tradable component of CPI, which includes goods and services that compete with international rivals, rose at a 0.1 per cent quarterly pace, and shrank 1 per cent on an annual basis as a strong New Zealand dollar makes imported items cheaper. The non-tradable component rose at a 0.5 per cent pace in the quarter, and a 2.5 per cent pace on the year.

A 3.8 per cent lift in local rates and more expensive housing costs drove the quarterly and annual increases in non-tradable inflation. Electricity prices fell 0.2 per cent in the quarter, taking the annual increase to 3.7 per cent.

Transport prices rose 0.1 per cent in the quarter, and were down an annual 0.5 per cent, due largely to a 1.8 per cent decrease in the price of petrol from a year earlier.