New Zealand’s CPI expected to have dropped by 0.4% in Q4 2015

Inflation in New Zealand in the last year continued to be slow in spite of a weaker currency due to increasing spare capacity and declining commodity prices globally.

"We estimate that the CPI fell by a further 0.4% over the December quarter, which would bring annual inflation down to 0.2%, a new low point for the current cycle", says Westpac.

This suggests that the OCR will be required to lower further. The OCR is likely to be cut to 2% in 2016.

Usually in the December quarters, the CPI declines because of seasonal influence of items. However, the expected 0.4% decline will be bigger than usual due to unusually big decline in food prices of 2.1% and renewed drop in oil prices globally, which depressed the petrol prices by over 5% in Q4. Nevertheless, the decline in Q4 2015 is similar to the one in Q4 2014, implying that the annual rate of inflation will have no net effect.

Tradable goods prices are likely to have moderate increase as the depreciation of the New Zealand dollar in the past year is slowly impacting retail prices.

"We expect this process to continue over 2016, although we don't think it will be enough on its own to lift annual inflation back within the 1-3% target band until the end of this year. Our forecast is lower than the 0.4% annual inflation rate that the Reserve Bank forecast in the December Monetary Policy Statement, as food and fuel prices have fallen further since then", says Westpac.