New Zealand Dollar Plunges after Inflation Comes Up Short; RBNZ Rate Cut Forecast for May

The New Zealand Dollar is trading sharply lower early Wednesday after a government report showed annual inflation slowed during the first quarter, missing central bank expectations and raising the chances of a rate cut in the next few months.

The bad news drove the Kiwi into its lowest level since January 3. The downside momentum created by the selling pressure has put the currency in a position to challenge its low for the year at .6591. Furthermore, it is now trading lower for the year.

At 01:15 GMT, the NZD/USD is trading .6703, down 0.0062 or -0.92%.

Early Wednesday, Statistics New Zealand reported the consumer price index had risen just 0.1 percent in the first three months of the year, below the 0.3 percent forecast by analysts and the 0.2 percent predicted by the Reserve Bank of New Zealand (RBNZ).

Statistics New Zealand also said that a 7 percent fall in petrol prices pushed down fuel and international airfares, and was partly behind the sluggish price growth. Non-tradables or domestic-led inflation, fared better, rising 2.8 percent on an annual basis.

Additionally, annual inflation came in at 1.5 percent, moving further below the RBNZ’s target midpoint of 2 percent and below expectations centered on 1.7 percent. The disappointing miss raised the prospect of the RBNZ cutting the official cash rate (OCR), currently at a record low of 1.75 percent, possibly as early as at its next monetary policy meeting on May 8.

Furthermore, the RBNZ had forecast annual inflation at 1.6 percent for the first quarter, down from the actual rate of 1.9 percent in the fourth quarter.

The news wasn’t actually a major surprise after central bank policymakers said in late March that its next rate move was more likely to be a cut than a hike. Furthermore, RBNZ Governor Adrian Orr told Reuters on Monday that the likelihood of the consumer price index undershooting its published forecasts had largely been factored into the dovish turn in the price of the New Zealand Dollar.

Traders are now pricing in at least two rate cuts by the RBNZ this year. Capital Economics and Westpac are forecasting the central bank will cut official interest rates by 25 basis points when it next meets in early May.