The New Zealand dollar rose to a two-and-a-half-month high after inflation climbed back into the Reserve Bank's target band, effectively scrapping the prospect of further rate cuts.

Government figures today showed the consumers price index rose 0.4 per cent in the December quarter for an annual increase of 1.3 per cent as the recovery in global oil prices pushed up local petrol costs and as the rampant housing market continues to drive rapid house price gains. The local currency climbed as high as 73.12 US cents, the highest since November 9, and recently traded at 73.07 cents from 72.70 cents immediately before the release, while two-year swaps rose 4 basis points to 2.42 per cent.

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Economists polled by BusinessDesk had been picking a quarterly pace of 0.2 per cent for an annual increase of 1.2 per cent, while the RBNZ's own forecast was for consumer prices to rise 0.2 per cent in the December quarter for an annual increase of 1.1 per cent. Governor Graeme Wheeler cut the official cash rate a quarter-point to a record-low 1.75 per cent in November, and projected the benchmark rate to stay unchanged through the bank's forecast horizon until the end of 2019.

Stuart Ive, senior dealer foreign exchange at OMF in Wellington, said the data shows inflationary pressures heading into 2017 could prompt the Reserve Bank to raise the OCR earlier than expected.


"It clearly does seem unthinkable now that we could possibly be in an easing cycle," Ive said. "That's one of the things it's going to be very difficult for the RBNZ to portray at its next meeting, because that could cause the kiwi to spike up."

The RBNZ's central forecast in November was for the OCR to remain unchanged for two years, however, it outlined several risks to that projection that could push rates either way.

Wheeler will review monetary policy on February 9 after a three-month break, and is today giving an off-the-record speech in his traditional state-of-the-nation address to the Canterbury Employers Chamber of Commerce. The bank has said Wheeler won't touch on monetary policy in his speech given the approaching monetary policy statement.

ASB Bank chief economist Nick Tuffley said today's data showed tradable inflation, which covers goods and services that compete internationally, was less of a drag than expected, and took any further cuts to the OCR "well off the table, barring some major development". Still, Tuffley was less convinced higher rates were on the cards this year. Rates markets indicating an early hike to the OCR were "premature", he said.

"The RBNZ will be relieved to see a reasonably broad-based lift in inflation over Q4," Tuffley said. "However, with annual inflation only just back within the target band for the first time in over two years and more downside risks on the horizon in terms of the NZD, we expect the RBNZ to leave the OCR on hold for the foreseeable future."