News: UPDATE 2-NZ's soft inflation pushes out rate hike expectations, knocks kiwi lower

• Q4 CPI rises 0.1 percent qtr/qtr, 1.6 percent yr/yr
• Food, household items drag on the index
• Data reinforces views RBNZ will keep rates on hold

(Re-casts, adds economist comments, updates throughout)

New Zealand's consumer prices rose at a slower-than-expected pace in the fourth quarter of last year, weighed by the falling costs of cars and food and hosing down expectations that the central bank will raise interest rates this year.

The consumer price index posted annual growth of 1.6 percent, edging back from the 2 percent midpoint of the central bank's target band and below the 1.9 percent expected by analysts.

The data release sent the New Zealand dollar down more than a cent to $0.7327. The kiwi last stood at $0.7347.

The surprise result was unwelcome news for the Reserve Bank of New Zealand (RBNZ), which has kept the official cash rate at a record low of 1.75 percent since late 2016 in an effort to help consumer price inflation stabilise around the middle of its 1 percent to 3 percent target band.

"It's clear that New Zealand's inflation pulse remains soft," said Paul Dales, chief Australia and New Zealand economist at Capital Economics. "As such, we think the markets are wrong to price in an interest rate hike this year."

The CPI rose just 0.1 percent in the three months to the end of December, undershooting analysts' forecasts of 0.4 percent.

The weak CPI reading prompted some economists to push back their forecasts for a rate hike in 2018 to next year.

New Zealand bank bill futures <0#NBB> jumped by their biggest daily increase in eight months, suggesting investors now expect the RBNZ to keep rates on hold for longer.

Inflation was dragged down by falling prices of food, cars and household items such as electrical appliances and glassware.

"Outside of the housing sector it becomes hard to find evidence of inflationary pressures building," Jane Turner, economist at ASB Bank.

The tepid inflation growth came despite the soaring cost of petrol, which rose 6.1 percent on the back of higher global oil prices. Housing-related costs provided the main source of domestic inflation with construction prices leaping 1.3 percent and rents up 0.5 percent.

Particularly worrying for economists are falling prices of larger household investments such as cars.

"We wonder if this might imply dealers are being forced to liquidate stock against a backdrop of softer big-ticket item spending," said Sharon Zollner, chief economist at ANZ Bank.

She added ANZ had revised its forecast rate hike to mid-2019, pushed back from November 2018.

The RBNZ is set to meet on Feb. 8 for its first monetary policy decision of the year.