* NZ posts annual CPI of 1.5 pct in Q1
* Undershoots cenbank and economists’ expectations
* NZD drops to more-than 3-mth low as data raises chance of rate cut (Adds economist quotes, bond market reaction)
WELLINGTON, April 17 (Reuters) - New Zealand’s inflation slowed more than expected in the first quarter, undershooting central bank forecasts and sending the local currency skidding to a three-month low as markets raised the chances of a rate cut in coming months.
Statistics New Zealand data showed the consumer price index had risen just 0.1 percent in the first three months of the year from the fourth quarter, below the 0.3 percent predicted by analysts and the 0.2 percent forecast by the Reserve Bank of New Zealand (RBNZ).
Annual inflation came in at 1.5 percent, moving further under the RBNZ’s target midpoint of 2 percent and below expectations centered on 1.7 percent. That raised the prospect of the central bank cutting the official cash rate (OCR), currently at a record low of 1.75 percent, possibly as early as at its next meeting on May 8.
The data sent the New Zealand dollar tumbling more than one percent to as low as $0.6667, its weakest since early January. It has since pared its losses slightly to trade around $0.6700.
“We expect 50bps of OCR cuts over 2019, with today’s CPI print raising the odds of a May cut,” said Nick Tuffley, Chief Economist at ASB Bank. “The NZ economy looks increasingly unlikely to be able to generate sufficient economic momentum that keep CPI inflation comfortably within the 1-3 percent inflation band.”
The central bank 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.
Last month, the RBNZ stunned markets by saying that its next rates move was more likely to be a cut than a hike.
Governor Adrian Orr had told Reuters on Monday that the likelihood of the CPI undershooting its published forecasts had largely been factored into that dovish policy turn.
A 7 percent fall in petrol prices pushed down fuel and international airfares, and was partly behind the sluggish price growth, the statistics agency said, offsetting gains from rising cigarette taxes at the start of the year.
But, non-tradables, or domestic-led inflation, fared better, rising 2.8 percent on an annual basis to a five-year high, which some economists thought might reduce the need for urgent action by the RBNZ.
“The Reserve Bank can look through today’s result to some degree – the surprise was largely in tradables prices, which are more volatile and tend to be more transitory,” said Michael Gordon, senior economist at Westpac Bank.
All the same, markets and most economists jumped on the weak result, betting the central bank would take the plunge and cut rates from already-record lows where they have been since late 2016.
Overnight index swap rates showed the market was pricing in a 65 percent chance of a rate cut in May, up from 30 percent before the CPI release.
Two-year bond yields fell 9 basis points to 1.48 percent.
“All told, today’s data will keep the RBNZ on course with the easing bias they adopted at their last rate decision in March,” said Ben Udy, Australia and New Zealand economist for Capital Economics.
“We think the RBNZ will cut rates twice this year in an attempt to kick-start the economy, with the first cut taking place at its next meeting in May.”
Reporting by Charlotte Greenfield and Praveen Menon; additional reporting by Wayne Cole Editing by Shri Navaratnam