New Zealand's inflation rate was so low over the September year that some economists said the Reserve Bank's next move could be to cut its official cash rate, and not raise it as many had predicted.
Statistics New Zealand (SNZ) said the Consumers Price Index rose by just 0.3 per cent in the September quarter, and by 0.8 per cent in the year - its lowest annual rate since 1999.
Deutsche Bank chief economist Darren Gibbs said domestic inflation pressures could build if the economy follows the tack suggested by the Reserve Bank in last month's monetary policy statement.
"That said, we think that the lower starting point for inflation presented by today's report opens the door a little wider to a potential policy easing late this year or early next year if there are any additional disinflationary pressures stemming from external developments or further signs that domestic economic recovery is likely to disappoint," Gibbs said in a commentary.
"However, in short we expect Governor (Graeme) Wheeler to maintain the official cash rate at 2.5 per cent, but to reinforce market expectations that policy easing cannot be ruled out over coming months while policy tightening remains a distant prospect," he said.
Wheeler, who was appointed governor last month, will release his first official cash rate review on October 25.
ANZ economists said if inflation expectations remained low and the labour market remained weak, the case for a rate cut would grow.
But for the time being, ANZ said it remained comfortable with a "lower for longer" interest rate theme, with its core view centred on the official cash rate not lifting until 2014.
Westpac said the low inflation number had stoked markets' interest in the possibility of official cash rate (OCR) cuts.
"We view an OCR reduction as a risk scenario rather than a likelihood," Westpac said.
It was also the first time inflation had dropped outside the Reserve Bank's 1 to 3 per cent target range since the band was introduced in 2002.
The central bank started inflation targeting in 1990, beginning with a zero to 2 per cent range. The band widened in 1996 to zero to 3 per cent, and went to 1 to 3 per cent in 2002.
In its release, SNZ said the increase in the CPI reflected higher housing-related prices and seasonally higher vegetable prices. These increases were countered by cheaper transport, telecommunication services, and milk.
Economists said the low quarterly number was mainly due to quirks that were unlikely to be repeated - used car prices fell 2.8 per cent and domestic airfares dropped by 7.8 per cent.
Meanwhile, housing-related inflation started to accelerate. The cost of building a new house was up 3 per cent nationwide over the past year, and rose 1 per cent over the quarter.
In Canterbury, the increase in building costs was 3.4 per cent for the quarter, for a 9.6 per cent increase in building costs over the past year.
"The detail is finer than the headline would suggest," Westpac senior currency strategist Imre Speizer said.
ASB economists said they now expected the Reserve Bank to wait until September next year before lifting its rate, having previously forecast a June rate hike.
"We expect that ongoing strength in the housing market, coupled with gradually rising domestic inflation pressures, will push the Reserve Bank to start gradually tightening in the closing stages of next year," ASB said.
However, expectations that the bank's next move would be a rate hike were far from universal.
BNZ currency strategist Mike Jones said the fact inflation was tracking well below the Reserve Bank's 1 to 3 per cent target range was "raising a few eyebrows" and added weight to the argument for a rate cut.
Westpac's Speizer said the market was starting to price in a greater likelihood of a rate cut.
The New Zealand dollar dropped by 30 basis points to US81.50c on the back of the CPI number but also in part due to Reserve Bank of Australia board notes, released today, which suggested pressure may also be building for a rate cut in Australia in November.
