(Adds details, comment, market reaction)
* NZ annual inflation drops back into target band
* Backs view rates will stay low for longer
* NZ dollar falls, debt futures rise
By Mantik Kusjanto
WELLINGTON, Jan 19 New Zealand's annual
inflation unexpectedly fell in the December quarter as food
prices dropped, giving the central bank plenty of leeway to keep
interest rates at a record low as global risks threaten to
derail a limp recovery in the domestic economy.
The consumer price index fell 0.3 percent in the three
months to Dec 31, to be 1.8 percent higher than a year ago, data
showed on Thursday. That was the first decline in two years.
Analysts polled by Reuters forecast a rise of 0.4 percent
for the quarter and 2.6 percent from a year earlier, in line
with the Reserve Bank of New Zealand's (RBNZ) forecasts.
New Zealand has seen soft price pressures over the past
year, leaving aside the one-off impact of a rise in the
government sales tax in October 2010.
"It means the RBNZ is probably on hold for the entire year.
Policy is already more than accommodative, so we can't see them
cutting any further," said RBC Capital Markets strategist
The New Zealand dollar fell nearly half a cent
after the data from $0.8070, but steadied around $0.8030. The
currency has risen about 4.5 percent over the past 12 months,
helping contain inflation.
Interest rate futures <0#NBB:> rose in a delayed reaction by
up to 9 points as markets pushed out the timing of future rate
The RBNZ cut its official cash rate by 50 basis points to a
record low 2.5 percent in March last year to help the economy
after a devastating earthquake the previous month.
The bank is expected to leave the cash rate there at next
week's first interest rate review of the year, and reiterate
that the uncertain global outlook and moderate domestic demand
make it prudent to keep rates on hold for now.
Last month, the RBNZ projected rate hikes to start from the
middle of this year.
In contrast, financial markets pricing implies a 6 percent
chance of a rate cut this month, with a largely flat outlook
over the next 12 months.
The majority of a Reuters poll of 18 analysts expect a rise
in the second half or even next year, with no prospect seen of a
rate move at the Jan 26 rate review.
The decline in December quarter inflation was driven by a
2.2 percent fall in food prices, largely volatile fresh fruit
and vegetables, and also appliances and furniture.
The non-tradables component of the index, a key barometer of
domestic inflation including electricity, house rental and
property prices, rose 0.2 percent on the previous quarter for an
annual rise of 2.5 percent.
Inflation for sectors like apparel and household contents
facing competition or open to currency changes fell 0.9 percent
on the previous quarter.
"The lingering impact of the strong New Zealand dollar and
the economy's spare capacity is keeping retail price inflation
down," said Westpac chief economist Dominick Stephens.
"At this stage there is little evidence of inflation
pressures stemming from a tighter housing market."
Recent data has indicated some stability in the housing
market, after a sluggish 2010.
The annual inflation rate hit a 10-year high in the second
quarter last year as the sales tax increase added an estimated
2.2 percentage points.
With business and consumer confidence slipping and pricing
intentions easing, inflation pressures are expected to remain
subdued in the near term, and well anchored within the RBNZ's
1-3 percent target zone.
Economic growth is expected to pick up this year as the
rebuilding of earthquake-hit Christchurch gains some momentum.
(Reporting by Mantik Kusjanto; Editing by Lincoln Feast and