Australia's headline inflation rate came in flat for the March quarter against expectations of a 0.2 per cent increase, according to a Bloomberg survey. The annual rate of 1.3 per cent was the weakest since the third quarter of 2016.
"It came in at something of a miss pretty much on every count," says Mike Shirley, a dealer at Kiwibank. The underlying annual rate of 1.42 per cent was the equal-lowest rate on record.
The data saw the Australian dollar plummet and "the New Zealand dollar essentially got taken along for the ride, really guilty by association," Shirley says.
Financial markets moved from pricing in about a 20 per cent chance of the Reserve Bank of Australia cutting interest rates in May to about a 60 per cent chance following the data.
A similar miss in New Zealand inflation data released earlier this month had meant the market was already pricing in about a 50 per cent chance the Reserve Bank of New Zealand will cut rates in May. That moved out to a 66 per cent chance after the Australian data.
"May looks to be a very exciting month in terms of potential central bank action," Shirley says.
Reflecting the change in pricing, the New Zealand two-year swap rate fell to 1.6002 per cent from 1.6439 yesterday; the 10-year swap rate sank to 2.1775 per cent from 2.2300.
Shirley says the data puts the RBA in somewhat of a dilemma because Australia's employment market remains strong with a 5 per cent unemployment rate. That suggests a rate cut isn't necessary but the inflation rate is well below the RBA's 2-3 per cent medium-term target.
The New Zealand dollar was trading at 51.17 British pence from 51.39, at 59.02 euro cents from 59.24, at 74.02 Japanese yen from 74.36 and at 4.4505 Chinese yuan from 4.4714.
