The New Zealand dollar dropped sharply against the US and Australian dollars after data from Statistics New Zealand (SNZ) appeared to back the case for more official interest rate cuts from the Reserve Bank.
By late morning, the Kiwi was trading just under US64c from US64.90c just before the release, which showed consumer price index fell by 0.5 per cent over the December quarter and rose by 0.1 per cent in the calendar year. Market and Reserve Bank expectations were for a 0.2 per cent quarterly decline in the CPI. Against the Aussie, the local currency fell to A92.6c from A93.90c just before the release.
"The market is looking at the total headline number and concluding that it certainly presents no impediment for rather rate reductions, if required," Sam Tuck, senior foreign exchange strategist at ANZ said.
"The market has been increasing the odds of a rate reduction by March."
Inflation was materially weaker in the quarter compared with the Reserve Bank's forecasts.
Most economists expect the Reserve Bank to keep its official cash rate on hold at 2.5 per cent but ASB Bank and Westpac both expect further cuts - to 2.0 per cent - based on a benign inflation environment.
"The result reinforces our view that inflation pressures won't pick up to the extent the Reserve Bank is forecasting without further rate cuts," ASB Bank chief economist Nick Tuffley said in a commentary.
"Not only does this support our view for further rate cuts, it suggests an increased risk that cuts could happen earlier than June, particularly if domestic and offshore economic conditions continue to deteriorate," he said.
The department said the quarterly decline was the largest quarterly fall since December 2008.
The annual increase followed a 0.4 per cent increase in the year to the September 2015 quarter. The previous smallest annual movement was a 0.5 per cent fall in the year to the September 1999 quarter.
Petrol prices, down 8.1 per cent, made the largest downward contribution for the year.
Excluding petrol, the CPI showed a 0.5 per cent increase in the year to the December 2015 quarter. The small movement for the year was also influenced by both lower vehicle relicensing fees and international air fares.
Housing and household utility prices were up 2.8 per cent in the year, with higher prices for housing rentals (up 2.5 per cent), newly built houses excluding land (up 5.0 per cent), and local authority rates (up 6.2 per cent).
"Housing-related prices in Auckland increased by more than the national average, with new houses up 7.2 per cent and rents up 3.3 per cent from a year earlier," the department's consumer prices manager Matt Haigh said.
The department said the CPI often falls in December quarters, due to seasonally lower vegetable prices and seasonal discounting. After adjusting for seasonal effects, the CPI fell 0.2 per cent over the quarter.
The Reserve Bank cut its official cash rate by 25 basis points to 2.5 per cent last December.