(Bloomberg) -- New Zealand’s inflation may have already peaked, raising the possibility of less aggressive interest-rate hikes in the first part of this year.

Consumer prices probably climbed 7.1% in the fourth quarter from a year earlier, economists predicted ahead of Wednesday’s report. That would be a bit slower than the prior reading of 7.2% and, more importantly, less than the 7.5% predicted by the Reserve Bank in its most recent forecasts.

Cooler inflation would give the central bank a lower starting point as it navigates a path back to its 1-3% target. The RBNZ estimated in November that the Official Cash Rate would need to rise to 5.5% by mid-year from 4.25% now, leading economists to pencil in a 75 basis-point hike at the February meeting. 

But weak business confidence, slow consumer spending and signs of waning global inflation pressures have prompted investors to price a 50 basis-point increase as more likely.

“Inflation looks like it has peaked,” said Satish Ranchhod, a senior economist at Westpac Banking Corp. who forecasts 6.9%. “With signs that domestic activity is cooling, a downside surprise to the RBNZ’s forecast would likely tilt market pricing further toward a 50-point move.”

Traders are currently pricing a less than 50% chance of a 75-point hike at the Feb. 22 meeting, the central bank’s first of the year.

The RBNZ joined global counterparts like the Federal Reserve in executing an ultra-aggressive tightening cycle to try to contain inflation, which spiraled to a three-decade high in mid-2022. Economists had seen that reading as the peak and were surprised when price pressures persisted into the second half.

Across the Tasman Sea, Australia reports fourth-quarter inflation about three hours after New Zealand’s release. A slower-than-expected outcome there could see the central bank in Sydney pause for the first time in its cycle.

The RBNZ sees inflation holding at 7.5% in the first quarter of 2023 and not returning to target until the second half of next year.

Non-tradables inflation, which largely reflects domestic variables, may have accelerated to 6.9% last quarter, said Sharon Zollner, chief New Zealand economist at Australia & New Zealand Banking Group Ltd. The RBNZ reckons 7%.

If non-tradables are that strong, “it won’t be straightforward for the RBNZ to meaningfully shift away from its hawkish stance,” she said. Policymakers “may well feel they have to wait for a fall in actual core inflation before backing off.” ANZ continues to expect a 75-point hike next month.

There are some signs that price pressures at home and abroad may not be as acute as the RBNZ had feared. US inflation continued to decelerate in December and short-term inflation expectations in early January were the lowest in nearly two years.

New Zealand’s currency also surged 13% against the US dollar in the fourth quarter, curbing import costs. 

Yet while business confidence has slumped as firms face dwindling profits, they still say they face rising costs and plan to increase prices further.

“Capacity frictions and labor shortages remain acute,” said Mark Smith, a senior economist at ASB Bank. He estimates inflation accelerated to 7.4% last quarter.

“The RBNZ does not have the luxury of sitting on its hands,” he said. “The least regret from the RBNZ still hinges on doing too little on OCR settings rather than too much.”

--With assistance from Tomoko Sato.

©2023 Bloomberg L.P.