* Consumer prices fall, below expectations
* Annual inflation 2.0 pct
* Pressure eases for central bank to raise rates sooner
* NZ dollar falls; bank bills jump after data (Adds details, comment, market reaction)
By Mantik Kusjanto
WELLINGTON, Jan 20 (Reuters) - New Zealand inflation pressures eased in the fourth-quarter, data showed on Wednesday, cooling speculation the central bank may need to start raising rates sooner than it has indicated.
The New Zealand dollar fell around two-thirds of a cent to settle around $0.7330. Wholesale interest rates also went lower, with the yields on interest rate swap falling between five and 12 basis points, as investors scaled back the chances of an early start to rate rises.
"The report pushes out the timetable for higher interest rates by over a month, which is negative for the kiwi dollar," said Westpac senior strategist Imre Speizer.
Financial markets, which had priced in almost a 50 percent chance of a first rate hike in March and fully priced for April, have now retreated, with only 16 percent factored in for March and 84 percent for April.
The consumer price index (CPI) fell 0.2 percent in the three months to Dec. 31 to be 2.0 percent higher than a year earlier, in line with the central bank forecasts and firmly within its target band of 1-3 percent on average over the medium term.
Economists polled by Reuters had forecast no change for the quarter and a rise of 2.1 percent from the same quarter a year earlier.
The data was being closely watched to see if it would provide a trigger for the Reserve Bank of New Zealand to start tightening monetary policy earlier than planned.
GRADUALLY IMPROVING ECONOMY
Recent data has pointed to a gradually improving economy, but it has not been seen as strong enough to warrant a change in its current stance to start tightening around mid-2010.
"This gives the Reserve Bank time to continue watching and monitoring how the economy evolves, and we still think a June start to the tightening cycle, rather than any pressure to start earlier," said ANZ-National Bank senior economist Khoon Goh.
Statistics New Zealand said the fall in consumer prices was driven by lower food prices, which offset higher international airfares.
The non-tradables component of the CPI, a key barometer of domestic inflation which includes electricity, house rentals and property prices, rose 0.1 percent on the previous quarter for an annual rise of 2.3 percent, the lowest annual increase since the December 2001 quarter.
The housing market has been improving over recent months because of tight supply and an improving economy, after its sharp decline in the past year, but the median price is still about 4 percent below its peak in November 2007.
The central bank has voiced its concerns about a return to debt-fueled housing inflation, which was a key factor in its lifting its cash rate to a record 8.25 percent by mid-2008.
The bank has held the key rate at a record low 2.5 percent since last June, after slashing by 575 basis points between July 2008 and April 2009 to drive the economy out of recession.
It is expected to leave rates unchanged at its next review on Jan. 28, according to a Reuters poll.
The poll showed eight of 19 respondents expect a rate rise in the first quarter, while 11 see a rise between April and June.
Analysts said the longer the central bank holds rates, the more aggressive it may have to be when tightening starts.
"Our fear is that the longer the OCR (official cash rate) stays at its historic (low) 2.5 percent, the greater the scramble to catch up," said RBC Capital Markets senior economist Ong Su-Lin.
Markets now bet on a 185 basis points of tightening over the next 12 months, down from around 200 basis points on Tuesday, according to a measure from Credit Suisse. (Additional reporting by Gyles Beckford and Adrian Bathgate; Editing by David Fox)