Inflation has fallen below the Reserve Bank's minimum target range of 1%-3% and the likelihood of 0% inflation is on the horizon by the end of this quarter.
As expected, the recent plunging oil prices and some food products prompted a 0.2% inflation decline for the quarter to December, which took the inflation rate from 1% to 0.8% for the year to December, according to the consumer price index (CPI), released by Statistics New Zealand yesterday.
Petrol prices made the largest downward contribution, being down 5.7%, while vegetable prices were down 14%, having been influenced by seasonally lower prices for tomatoes, lettuce and cucumber.
Those declines were countered by higher prices for international travel and housing-related costs, SNZ prices manager Chris Pike said.
ASB senior economist Jane Turner said given how long inflation had been low, ASB judged it was increasingly unlikely the Reserve Bank would lift the OCR in 2015.
''The balance has tipped to the OCR remaining on hold over the next couple of years. We have changed our OCR view to now expect no OCR increases for the foreseeable future,'' Ms Turner said.
Similarly, ANZ senior economist, Mark Smith, said he now expected ''no further hikes for the foreseeable future'', while BNZ senior economist saw no OCR cuts until 2016.
Westpac chief economist, Dominick Stephens, said inflation straying from its target range, coming in lower than expected yet again, would make the Reserve Bank ''very nervous''.
''The recent sharp decline in petrol prices is set to cause a 0.4% decline in the March quarter CPI. That will take inflation to only a whisker above zero,'' he said.
''Nil inflation will torpedo any lingering notion of the Reserve Bank hiking the OCR in the near term, and could even cause financial markets to begin assessing the risk of OCR cuts,'' Mr Stephens said.
Mr Stephens' forecast is for no OCR increase until March 2016, but the risks were shaping up in the direction of an even later date for rises, he said.
The Reserve Bank was likely to argue the inflation dip was transitory, caused by a one-off oil price decline, and that booming construction activity and population growth still point to rising inflation in the medium term.
''This will have the Reserve Bank concluding that OCR cuts would be inappropriate,'' he said. However, the Reserve Bank's desire to signal an eventual increase in interest rates ''must surely have dwindled'' as inflation had fallen and the exchange rate strengthened, he said.
Ms Turner said further declines in petrol prices would subtract another 0.8% from inflation during the first quarter of 2015.
Headline inflation was going to be below 1% for most of 2015, and might not move significantly away from 1% until the final quarter of 2015, she said.
SNZ's Mr Pike said the annual increase in prices had slowed, being the smallest annual rise since the June 2013 quarter, noting housing and household utilities was the main contributor in the latest year.
Newly built houses were up 5.4%, housing rentals up 2.1% and electricity was up 3.6%.
