WELLINGTON: New Zealand inflation slowed more than forecast to its weakest in three years in the second quarter even as domestic price pressures persisted.

The annual inflation rate fell to 3.3% from 4% in the first quarter, Statistics New Zealand said yesterday in Wellington.

Economists expected 3.4% while the Reserve Bank of New Zealand (RBNZ) had forecast 3.6%.

Consumer prices advanced 0.4% from three months earlier, less than the 0.5% estimate of economists.

While headline inflation is slowing, yesterday’s report showed ongoing stickiness in domestic prices such as rents, insurance and local government levies that may concern the RBNZ.

The New Zealand dollar rose as traders scaled back expectations the central bank could cut interest rates as soon as its next policy meeting on Aug 14.

Investors now see a 48% chance of a rate cut in August, down from just over 50%, but continue to price at least two reductions by November, swaps data show.

The RBNZ held the official cash rate at 5.5% last week but surprised markets by acknowledging signs of a deepening economic downturn, saying tight monetary policy may be curbing demand “more strongly than expected.”

The central bank sounded much more confident that inflation will return to its 1% to 3% target band this year, fuelling bets that rate cuts could start within months.

“We see headline inflation landing in the central bank’s target range this quarter, giving the RBNZ breathing room to start easing the official cash rate from November,” said Shannon Nicoll, associate economist at Moody’s Analytics.

“But that is far from certain. We first need to see more encouraging signs from domestic inflationary pressures.”

Annual non-tradables inflation, a closely watched indicator of domestic price pressures, slowed to 5.4% in the second quarter from 5.8% in the first. The RBNZ tipped 5.3% in its May projections.

Rodrigo Catril, a strategist at National Australia Bank, said the inflation report was mixed, making an August rate cut too close to call.

“On the positive side, headline is still approaching target range, increasing confidence annual consumer price index will be in the band in the third quarter,” he said.

“But the RBNZ is a true inflation-targeting bank and it will be concerned at the slow progress seen in non-tradables inflation.”

Housing and household utilities was the largest contributor to the annual inflation rate due to rising prices for rent, construction of new houses and local government rates, the statistics agency said. Insurance costs jumped 14% in the year.

“Domestic inflation continues to moderate, albeit slowly,” said Mary Jo Vergara, an economist at Kiwibank in Auckland.

“Rental inflation continues to run hot, and services inflation remains elevated. However, we suspect we’re nearing a turning point as the economic backdrop deteriorates.”

 - Bloomberg