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New Zealand’s inflation rate slowed to the lowest level in seven quarters as a recession curbed consumer demand, prompting companies to cut prices.

Consumer prices rose 1.9 percent in the year ended June 30, Statistics New Zealand said in Wellington today. Inflation slowed from 3 percent in the year to March and was higher than the 1.8 percent median estimate in a Bloomberg News survey of 10 economists. From the first quarter, prices gained 0.6 percent.

The inflation rate has tumbled from an 18-year high of 5.1 percent in the year ended Sept. 30 amid the worst recession in three decades that has driven up unemployment and dented confidence. Reserve Bank Governor Alan Bollard has cut the official cash rate to a record-low 2.5 percent and last month said he is unlikely to increase borrowing costs until late 2010.

“Inflation is decelerating. Probably not as rapidly as one would suspect given the economy is in recession,” said Annette Beacher, senior fixed-income strategist at TD Securities Ltd. in Singapore. An interest-rate increase “is a long way down the track.”

New Zealand’s dollar bought 64.61 U.S. cents at 3:20 p.m. in Wellington from 64.74 cents immediately before the report.

The inflation rate fell back into the central bank’s target range of between 1 percent and 3 percent for the first time since 2007.

Price Cuts

Bollard on June 11 forecast prices would rise 1.7 percent in the year through June and just 0.7 percent in the 12 months ending Sept. 30.

Twenty three percent of companies cut prices in the second quarter, according to a survey by the New Zealand Institute of Economic Research Inc. About 53 percent of companies surveyed said profits fell, the Wellington-based institute said on July 7.

Smiths City Group, an appliance and furniture retailer, said last month profit margins had “come under severe pressure” because of competition. Net income plunged 71 percent in the year ended April 30, it said.

Finance Minister Bill English says the road to recovery “will be quite bumpy” as the economy relies on overseas demand for exports and needs to be more attractive to investors individual health insurance plans.

“The silver lining from the recession is that our inflationary pressure is abating, ” English told reporters in Brisbane, Australia, today. “In the long run, that will help our export competitiveness.”

Bollard, who forecast the economy will start growing in the fourth quarter, this week said the nation may start recovering sooner than its major trading partners, prompting investors to increase bets he will raise interest rates.

Rate Outlook

Traders expect 79 basis points of rate increases over the next year, according to a Credit Suisse index based on swaps. The governor will leave the official cash rate at 2.5 percent at his next review on July 30, according to all 12 economists surveyed by Bloomberg.

Inflation accelerated last year amid soaring fuel and air travel costs. The consumer price index rose 1.6 percent in the second quarter of last year and 1.5 percent in the third quarter.

Many of those prices are now declining. Gasoline prices declined 17 percent from the year earlier and international airfares tumbled 21 percent, the statistics bureau said today.

Bollard’s primary focus is on non-tradable inflation, a core measure of prices that are not influenced by currency fluctuations and fuel.

Non-tradable prices rose 0.5 percent from the first quarter, the smallest gain in eight years. The measure gained 3.3 percent from a year earlier.

Non-tradable inflation was led by a 1.6 percent gain in electricity charges and a 2.8 percent jump in the price of beer. The cost of buying and building a new house increased 0.2 percent.

Tradable prices rose 0.8 percent from the first quarter led by higher fuel and used-car prices. International airfares fell 14 percent in the quarter.

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