NZ Inflation Lower Than Expected, NZD/USD back below 0.86

New Zealand inflation unexpectedly slowed and dairy prices extended a decline, sending the nation’s currency lower as traders pared bets on the scale of future interest-rate increases.

The annual inflation rate fell to 1.5 percent in the first quarter from 1.6 percent in the final three months of 2013, Statistics New Zealand said in Wellington today. Economists predicted an acceleration to 1.7 percent, according to the median of 14 forecasts in a Bloomberg News survey. Separately, dairy prices fell for a fifth successive auction, extending their decline to 21.9 percent, GlobalDairyTrade said overnight.

Reserve Bank of New Zealand Governor Graeme Wheeler raised the official cash rate from a record low last month and said he may increase the benchmark by a total of 125 basis points this year to contain inflation. Since then, the strengthening kiwi dollar has damped import prices, while falling dairy prices may start to curb export returns.

“Lower-than-expected inflation will obviously reduce the urgency for the Reserve Bank to hike,” said Dominick Stephens, chief economist at Westpac Banking Corp. in Auckland. While Westpac still expects Wheeler to raise rates next week and again in June, “low inflation plus the high exchange rate and falling dairy prices, taken together, have placed a cloud over our forecast for a July hike,” Stephens said.

Bloomberg

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