Latest data from December quarter shows inflation at 16-year low.

Momentum for still lower official interest rates is growing following the release of data showing New Zealand inflation was at its lowest point in 16 years.

The Reserve Bank last year cut the official cash rate four times, to 2.5 per cent, where most bank economists had expected the rate to stay. But ASB and Westpac have continued to make a case for two more cuts of 25 basis points each, to 2.0 per cent, and December quarter data has added more weight to their view.

In the markets, short term interest rates fell and the New Zealand dollar dropped by over US1c to a session low of US63.66c on the back of the data.

At just 0.1 per cent for 2015, annual inflation is on the cusp of deflation and well beneath the Reserve Bank's target range of 1 to 3 per cent.


Economists see deflation - when prices fall - as a bigger problem than inflation. Falling prices can make consumers take to the sidelines, prompting recessions and a deflationary spiral. Inflation was materially weaker in the quarter compared with the Reserve Bank's forecasts.

"The result reinforces our view that inflation pressures won't pick up to the extent the Reserve Bank is forecasting without further rate cuts," ASB Bank chief economist Nick Tuffley said.

The department said the 0.5 per cent quarterly decline in the CPI was the largest quarterly fall since December 2008.

Petrol prices, down 8.1 per cent, made the largest downward contribution for the year. Excluding petrol, the CPI showed a 0.5 per cent increase in the year. Housing and household utility prices were up 2.8 per cent in the year, Statistics NZ said.

Housing-related prices in Auckland increased by more than the national average, with new houses up 7.2 per cent and rents up 3.3 per cent from a year earlier.

Statistics said the CPI often fell in December quarters, due to seasonally lower vegetable prices and seasonal discounting.

UBS economist Robin Clements said he expected resource constraints, improving growth prospects and housing to stay the Reserve Bank's hand in adjusting its official cash rate.

"But we have to recognise that global developments, oil included, and lower-than-expected headline inflation represent a risk that the Reserve Bank could ease further this year."

Westpac senior economist Michael Gordon said yesterday's outcome would be a big surprise for the central bank, which had expected the annual inflation rate to hold steady at 0.4 per cent and then return above 1 per cent in the early part of this year.

"And if oil prices remain low, there's a real chance that inflation could drop below zero at some point this year."

Yesterday's developments - weaker than expected inflation, lower dairy prices, and ongoing evidence that the Auckland housing market has cooled off - meant that a March rate cut was a serious consideration, Gordon said.

ANZ said the market was gunning for a cut in the official cash rate as soon as March. "We can understand the sentiment, but that looks extreme considering current conditions."

"Our core view remains for the OCR to remain unchanged," ANZ said. However, this is heavily conditional on economic indicators holding up. The Reserve Bank's next review of its official cash rate is due next Thursday.

See the full Statistics NZ CPI release here: