April 20, 2017 / 1:37 AM / 4 months ago

NZ inflation surprisingly strong in first quarter, causes mostly temporary

People buy fruits at a fruit and vegetable market in front of the Te Papa Museum in Wellington October 2, 2011.Jacky Naegelen/File Photo

WELLINGTON (Reuters) - New Zealand's inflation accelerated to a surprisingly brisk 2.2 percent in the first quarter, its highest in five years, but that was unlikely to prompt the central bank to waver in its determination to keep interest rates at record lows.

The result put the consumer price index squarely in the mid-point of the Reserve Bank of New Zealand's (RBNZ) mandated target range of 1 to 3 percent, after more than a year of concerted effort to lift tepid inflation.

The CPI rose 1 percent in the first quarter, higher than the 0.8 percent expected by analysts which had led them to predict annual growth of 2 percent.

The New Zealand dollar NZD=D4 rose to $0.7042 in the wake of the release, from around $0.7000.

The lift in inflation was largely due to temporary gains from higher oil and food prices and a tax hike on alcohol and tobacco, along with ongoing rising costs from a boom in housing construction.

"It's very tentative. The underlying inflation pulse is picking up, but very slowly, so we think the Reserve Bank will remain pretty cautious," said Sharon Zollner, senior economist at ANZ Bank.

Stripping out petrol, alcohol and cigarettes, put annual inflation at a more modest 1.5 percent, though that was still comfortably within the RBNZ's target band.

"The core reading is still low and the trimmed mean is creeping back into the target band but it's still on the lower end," said Tom Kennedy, economist at JP Morgan.

"Inflation is still pretty soft by historical standards. For us, the RBNZ will probably just remain on the sidelines from here."

The central bank slashed rates over the past year to a record low of 1.75 percent and signaled in its February Monetary Policy Statement that it would keep rates at that level for two years or more to boost inflation and offset global uncertainty.

Reporting by Charlotte Greenfield; Editing by Eric Meijer

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