New Zealand inflation lowest in 16 years

New Zealand was hovering just above deflation according to official figures released Wednesday, which showed a lower-than-expected inflation rate of 0.1 percent for the past year.
The surprisingly low figure -- the smallest annual movement since a 0.5 percent fall in the year to September 1999 -- raised the prospect that the central bank, which had forecast 0.4 percent annual inflation, would further reduce interest rates.

The figures, released by Statistics New Zealand, sent the New Zealand dollar down by about half a cent to 64.14 US cents.

Inflation for the December quarter fell 0.5 percent while market expectations were for a 0.2 percent decline.

The Reserve Bank of New Zealand, which has a target inflation band of 1.0-3.0 percent, cut the official cash rate four times last year to a record low of 2.5 percent, and further cuts are now expected.

The fresh inflation data "leaves New Zealand on the cusp of outright deflation", Capital Economics' chief economist for Australia and New Zealand Paul Dales said in a note.

"It may not quite be enough to prompt the (central) bank to cut rates at next Thursday's policy meeting, but it certainly supports our non-consensus view that rates will be cut from 2.5 percent to 2.0 percent this year."

Inflation has been below the Reserve Bank's target for a year and Westpac Bank's senior economist Michael Gordon told Radio New Zealand he doubted it would return to the expected zone in 2016.

"It's certainly going to be causing some headaches for the (central) bank over the next few reviews, and raises the chances of a rate cut as soon as March," he said.

New Zealand's inflation rate usually falls in the December quarter with seasonally lower vegetable prices but it was accelerated in the latest figures by falling petrol prices.

Excluding petrol, the inflation rate showed a 0.5 percent increase for the year to December.

"Lower prices for petrol and vegetables were partly countered by higher prices for housing-related costs and airfares," Statistics New Zealand consumer prices manager Matt Haigh said.

Petrol prices were down 7.0 percent for the quarter while vegetable prices showed a seasonal fall of 17 percent.