By James Glynn

SYDNEY--New Zealand's inflation rate was flat in the second quarter as the cost of fuel and airfares prices fell, removing pressure on the central bank to raise interest rates any time soon.

The New Zealand dollar fell sharply on the outcome, which lent support to the view of the Reserve Bank of New Zealand that a spike up in inflation earlier in the year was fanned by temporary factors.

Consumer prices were flat in the second quarter and rose by 1.7% from a year earlier, Statistics New Zealand said Tuesday. Economists had expected consumer prices to rise 0.2% in the three months to June and by 1.95% over the year.

"Household basics like rent, food and electricity all hit consumers pockets harder this quarter. Offsetting these price rises were falls in domestic airfares and petrol price," said Jason Attewell, prices senior manager at Statistics New Zealand.

These figures are lower than the RBNZ expected. In May the bank said prices would grow by 0.3% in the second quarter.

In the first three months of the year inflation rose 1% to come into the middle of the bank's 2-3% target band for the first time since 2011. Still, it tacked to its neutral stance in June and said rates would remain on hold at a record-low 1.75% for the foreseeable future.

While the RBNZ says inflation is "well-anchored" at around 2% in the long-term, it expects it to drop as low as 1.1% in the first three months of 2018.

New Zealand's agriculture-rich economy expanded 3% in the year through March, putting it among the world's fastest-growing developed economies. Wages are rising, and most industries are adding more jobs, led by tourism and booming housing construction. The strongest immigration in a century is re-energizing demand.

The bank has been balancing the demands of a nascent recovery in inflation against a frothy housing market, though there are signs that residential property is beginning to cool, helped by tighter lending rules by banks and uncertainty ahead of a general election in September.

-Write to James Glynn at james.glynn@wsj.com

(END) Dow Jones Newswires

July 17, 2017 19:06 ET (23:06 GMT)

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