Inflation projections are "continuing to tumble" with the rapid drop in global commodity prices, the recent plunge in oil prices being the most significant, BNZ senior economist Stephen Toplis said yesterday.
"When annual CPI [consumer price index] inflation peaked at 5.1% in the third quarter, roughly half of this could be attributed to the previous increase in petrol prices," Mr Toplis said.
Global oil prices topped $US147 in July, but yesterday were now below $US55 a barrel and expected to keep falling.
Mr Toplis said that if oil and petrol had "stabilised", inflation would have been expected to fall to 2.5%, noting the Reserve Bank had assumed in September oil would be at $US114 at the end of the year and at $US95 by March, whereas Dubai oil was yesterday trading well below $US50.
"Instead oil prices and in turn pump prices have plummeted," he said.
The Reserve Bank used the official cash rate (OCR) to try to contain NZ's booming household spending, then switched its focus to containing inflation once the likelihood of inflation exceeding the bank's preferred 1%-3% target became obvious.
Mr Toplis expected almost zero movement in prices during the next six months and annual inflation to be close to the "low edge" of the Reserve Bank's preferred 1%-3% range by November next year.
"We believe that, at long last, inflation will then be contained within that band for the foreseeable future," he said.
This would give the Reserve Bank the "green light" to make further "aggressive" cuts to the OCR, which at 6.5% remains the highest in the developed world and is lagging behind massive cuts implemented by other world banks recently to kick-start economies heading towards recession.
Pressure is mounting on the Reserve Bank to cut the OCR now, or least at the next scheduled revision on December 1, by 1% many analysts say.
A side issue, but with major effect, is the NZ dollar's volatility when the OCR is so high and the effect it has for exporters against its exchange rate with Australia, the coun-try's largest trading partner.
Mr Toplis said based on the inflation outlook, he expected a full 1% cut by the Reserve Bank on December 4 and a further 0.5% cut in January.
He also forecast that the OCR would hit a "trough" of 4.5% by mid-2009.
