The New Zealand dollar slipped on Thursday after data showed inflation was not quite as hot as feared in the first quarter, leading investors to slightly widen the odds on another half-point interest rate hike.
The kiwi dollar eased 0.4% to $0.6772 NZD=D3 , unwinding some of Wednesday's 1% rally. Support comes in at the recent seven-week low of $0.6717.
The Aussie held steady at $0.7445 AUD=D3 , having also bounced 1% overnight thanks in part to flows out of the embattled Japanese yen.
Two-year swap rates NZDSM3NB2Y= dropped 6 basis points to 3.52% as investors reconsidered very hawkish expectations for how fast and far rates would rise.
The data showed New Zealand consumer prices jumped a huge 1.8% in the first quarter, from the previous quarter, but still missed forecasts of a 2.0% rise.
Annual inflation accelerated to 6.9%, up from 5.9% and the fastest since 1990, but short of the 7.1% expected. Indeed, markets had wagered on an even higher outcome given how inflation around the world has been surging.
The jump was driven by the rising cost of petrol, home construction, rents and tobacco, which saw annual inflation for tradeable goods hit a record 8.5%.
The Reserve Bank of New Zealand (RBNZ) has already lifted the official cash rate four times, with the last an aggressive half-point move to 1.5%.
Policy makers are worried high inflation will feed through to future price and wage settings and risk an inflation spiral that might only be tamed through a forced recession.
"Crucially for the RBNZ, both households and businesses are expecting that inflation will remain strong for some time yet," said Satish Ranchhod, a senior economist at Westpac. "That's a big concern for the central bank.
"We're forecasting a 50bp rise in the OCR at the RBNZ's May policy meeting, followed by 25bp increases at every meeting in the back half of the year."
The swap market was still heavily priced for a half-point hike in May, though a little less than before the data.
"Looking ahead we think inflation is now around its peak," said Ben Udy, an economist at Capital Economics.
He noted a cut in excise taxes should reduce fuel costs this quarter, while house prices were now falling from their highs, which could help ease construction costs.
"The chance the RBNZ hikes rates by another 50 basis points in May has now diminished," added Udy. "But we still suspect rates will rise to 3.0% by the end of this year."
