WELLINGTON (Reuters) - New Zealand's inflation edged up in the fourth quarter on higher service costs, and though overall price growth remained subdued, investors pared up some of the more aggressive bets on the prospects of an interest rate cut later in the year.
Chances of an easing this year were always slim, but it was left on the table by policymakers in recent comments and raised by analysts after economic growth in the third quarter slumped to its slowest pace in nearly five years.
The consumer price index (CPI) rose 0.1 percent in the fourth quarter of 2018, from the previous quarter, a touch weaker than the Reserve Bank of New Zealand's (RBNZ) forecast of 0.2 percent and below the 0.9 percent rise in the previous quarter, data released on Wednesday showed.
Year-on-year inflation was at 1.9 percent, in line with the third-quarter figures and slightly below RBNZ's target midpoint of 2 percent.
The numbers, however, were above forecasts in a Reuters poll centred on inflation easing to 1.8 percent on-year and for no change quarter-on-quarter. That shook off some overly bearish inflation expectations and in turn dampened any near term chance of a rate cut.
The inflation data will allow the RBNZ to continue keeping rates at a record low for now, but fading economic momentum and global risks will have to be addressed, ANZ Bank economists said in a note.
"We expect to see a more dovish RBNZ in time, though today’s data will not contribute to any weaker tone as soon as next month," said ANZ senior economist Liz Kendall.
ANZ still expects a rate cut later this year to keep growth at or above potential and push up inflation close to the target midpoint.
RBNZ's next monetary policy meeting is scheduled for Feb 13.
The overnight rate swaps ticked up after the inflation data. It is now pointing to a 20 percent chance of an interest rate cut in one-year's time, down from 36 percent on Tuesday.
The New Zealand dollar <NZD=D4> rallied, rising 0.5 percent after the inflation data was released but eased later to settle at $0.6764.
RBNZ’s own measure of core inflation, the sectoral factor model, also released on Wednesday, was unchanged at 1.7 percent year-on-year
'DISTANT PROSPECT'
Food prices fell 1.3 percent over the previous quarter while petrol prices dropped 0.6 percent, but these were offset by a rise of 1.7 percent in costs for passenger transport services, which reached their seasonal peak.
Crucially, a measure of non-tradable inflation, or domestic inflation favoured by the central bank, spend up 2.7 percent annually, the highest since the second quarter of 2014.
"All told, the improvement in underlying inflation means the RBNZ won’t be cutting interest rates anytime soon," said Ben Udy, Singapore-based economist for Capital Economics.
"But with headline inflation set to fall further below target, combined with a slowing in GDP growth, we think that rate hikes remain a distant prospect."
In November, the RBNZ struck a neutral tone saying its next move would depend on how the economy fared and cautioned of downside risks from global trade frictions.
Global risks have been building with concerns over U.S.-China trade, a slowdown in China's economy and Brexit, though some recent indicators for New Zealand have pointed to modest improvement in economic activity.
(Reporting by Praveen Menon; Editing by Leslie Adler & Shri Navaratnam)
