Inflation has reached an 18-year high of more than 5% but that is not expected to dampen the likelihood of the Reserve Bank cutting the interest-driving official cash rate by up to 1% tomorrow.
Food and petrol inflation for the quarter to September were the mainstay of the 1.5% quarterly increase, bumping annual inflation to 5.1%, and there was still momentum in inflation which was yet to show any signs of softening, ASB chief economist Nick Tuffley said.
"In more normal times, the underlying picture would cause the Reserve Bank a lot of discomfort," Mr Tuffley said.
The consumer price index rose 1.5% for the third quarter to September, having risen 1.6% during the second quarter, pushing the annual inflation rate to 4% at the time, Statistics New Zealand said yesterday.
Both the September quarterly and annual figures were about 0.2% higher than Reserve Bank expectations, but in line with market expectations.
The Reserve Bank had initially held its official cash rate high to dampen a rampant housing market in New Zealand, but since it began cooling then shifted attention to containing inflation, before the unravelling of financial institutions, banks, credit crunch and sharemarket turmoil.
Inflation is already well beyond the Reserve Bank's preferred 1% to 3% range, but Mr Tuffley said it needed to focus on the borrowing costs and the negative risks to growth stemming from the global credit crunch.
The Reserve Bank last cut the official cash rate on September 11, from 8% to 7.5%, but it remains the highest in the developed world.
In line with other central banks around the world slashing rates to combat the credit crunch and prompt consumer spending, there is mounting pressure for a 1% cut to New Zealand's rate.
"With the market expecting a 100 basis point [1%] cut on Thursday, we believe the Reserve Bank will be reluctant to disappoint, which would only cause unnecessary volatility," he said.
Similarly, ANZ chief economist Cameron Bagrie said there appeared to be no signs of a curb to domestic inflation pressure and there would still be an "aggressive easing" to the cash rate by the Reserve Bank.
He believed the annual inflation rate of 5.1% had peaked, because of the sharp decline in the domestic economy and labour market, and there was an improvement in the medium-term outlook.
However, in the short term domestic inflation pressure remained "sticky" because of local authority rates and rising electricity charges.
Mr Tuffley said while the credit crunch had escalated dramatically during the past six weeks and there were "tentative signs of recovery", recovery was a long way off.
"Bringing expected rate cuts forward will provide good insurance against considerable uncertainty," Mr Tuffley said.
The Reserve Bank would be "relying heavily" on weak domestic and global economies to contain inflation pressure over time, he said
