New Zealand's inflation rate was lower than expected over the third quarter, adding weight to the case for more stimulus from the Reserve Bank, economists say.
However, a resurgent house price market would make for a fine balancing act for the central bank as it seeks to revitalise an economy still reeling from the impact of Covid-19.
Data from Stats NZ showed higher prices for vegetables and rates, and a rebound in the cost of public transport, led to a 0.7 per cent rise in the consumers price index in the September 2020 quarter, taking annual inflation to 1.4 per cent.
The quarterly result was well below the Reserve Bank's forecast of 1.1 per cent.
"It's very uncertain, going forward, what the inflation rate will be, but it highlights the difficult balancing act that the Reserve Bank has," ASB economist Mark Price said.
"But in all likelihood, we think more stimulus is needed," he said.
Price noted there were signs the domestic economy - particularly property - was responding to very low mortgage rates and other support measures.
"On the basis of the very weak inflation outlook, and a highly uncertain outlook for the economy, you have to go with what is the most likely course for inflation and the economy as well," he said.
Reserve Bank governor Adrian Orr is expected to unveil plans for the Funding for Lending Programme (FLP) at next month's monetary policy statement.
Going on the size of other similar packages deployed overseas, Price expects the programme to be worth $30 billion to $50 billion, and to be heavily skewed towards small to medium-sized businesses.
ANZ said from today's weak starting point, the outlook is for softness in inflation over the medium term and current low inflation could serve to reinforce low inflation expectations.
"The case for more monetary stimulus remains clear for now, with an FLP expected to be deployed in November," the bank said.
The Reserve Bank said in August its Monetary Policy Committee had agreed a package of additional monetary instruments must remain "in active preparation".
Statistics NZ said the gain in inflation over the quarter more than reversed a 0.5 per cent drop in inflation during the June 2020 quarter, when petrol prices fell sharply as the Covid-19 pandemic hit.
By early June, New Zealand was back to Covid alert level 1, but in mid-August, the Auckland region moved back to alert level 3. The rest of New Zealand moved to Covid alert level 2 at this time.
Covid-19 uncertainty was a factor in the 18 per cent rise in vegetable prices over the September quarter.
"Because restaurants and cafes were shut during Covid alert levels 3 and 4 in April, many tomato growers delayed or reduced planting their crops during this time because they were not sure if demand would recover," Stats NZ's prices senior manager Aaron Beck said. Beck said this led to a supply shortage in the September quarter.
Council rate rises were more muted than usual this year, in the wake of Covid-19. The 3.1 per cent annual increase in local authority rates and payments is the smallest in 20 years.
Westpac's Michael Gordon said while the economy had bounced back rapidly from the lockdown, it was still operating well below its pre-Covid trend, which he expected would put downward pressure on prices.
Gordon said the annual inflation rate is also likely to drop by around 0.3 per cent next year because of the end of the "jumbo-sized" annual increases in tobacco excise duty.