Banks are forecasting further cuts to interest rates after statistics yesterday revealed the annual inflation rate had fallen to 3%, within the Reserve Bank of New Zealand's target band for the first time since December 2007.
ANZ National chief economist Cameron Bagrie said there were signs inflation could fall further, to the bottom end of the Reserve Bank's (RBNZ) inflation target range of 1% to 3%, by the end of this year.
This, along with general economic weakness, could prompt a 0.5% (50 basis points) reduction in the official cash rate later this month, he said.
Statistics New Zealand yesterday reported inflation for the March quarter of 0.3%, which took annual inflation to 3% compared with 3.4% for the 12 months to the December quarter.
Inflation has fallen sharply as the economy has slowed, from an 18-year high of 5.1% in the 12 months to last September.
Rising prices for food (1.2%), and alcohol and tobacco (1.8%) remained the largest contributor for the March quarter increase, but Mr Bagrie said food prices had been slow to respond to the sharp fall in international commodity prices.
Fruit and vegetables led the quarterly increase, rising 1.6%, followed by meat and fish at 1.4%.
There were signs underlying inflation pressures were easing, with the March increase the smallest quarterly rise since June 2003.
Non-tradeable inflation rose 0.7%, well below the 1% average quarterly increase since 2002, while the weaker labour market also appeared to be having an impact, with prices for services rising 0.5%, the smallest increase since March 2001.
Construction prices were also flat, for the quarter, lifting 0.2%, the smallest increase since June 1998.
"While the typical lags between economic activity and prices looks to have been maintained, it is clear that demand-pull forces, as the economy weakens and spare capacity opens up, are seeing pricing pressures reduce," Mr Bagrie said.
Westpac chief economist Brendan O'Donovan said 2009 would be the year of deflation.
He expected inflation to fall below the RBNZ target band of 1% to 3% later this year and stay at the bottom end of the range through next year as the recession deepened, creating economic slack with reduced capacity utilisation and rising unemployment.
Mr O'Donovan agreed the RBNZ could cut the official cash rate by 0.5% at its review later this month.
"The world situation and the extreme weakness in the quarterly survey of business opinion, along with the very soft outlook for inflation through 2008 and 2009, provide much more reason to continue cutting rates."
Meanwhile, the New Zealand Manufacturers and Exporters Association (NZMEA) said the successful fight against inflation had come at a cost to the economy, highlighting the ineffectiveness of the official cash rate as an inflation control tool.
"It has taken two years and a recession to get inflation back inside the target range. That suggests we need to modify the Reserve Bank Act," NZMEA chief executive John Walley said.
