New Zealand dollar slugged by inflation surprise, Aussie hangs on

The kiwi retreat came after the Reserve Bank of New Zealand released its survey of inflation expectations, showing the one-year outlook fell sharply to 2.6%, from 3.4%, taking it back to where it was before the war in Iran drove up fuel prices.

The two-year outlook eased to 2.34%, from 2.35%, suggesting expectations remain anchored and there is less risk of the oil shock feeding through to broader inflation in the country.

"This will be welcome news for the RBNZ," said Satish Ranchhod, a senior economist at Westpac. "But core inflation was at firm levels even before the Middle East conflict and business surveys point to ongoing pressures on operating costs."

"We're forecasting two more 25bp hikes this year, most likely at the September and December meetings."

Investors are still wagering heavily on a September rise in the 2.5% cash rate, in part because the central bank has repeatedly flagged the need to make policy less stimulative.