(Updates market and analyst reaction, RBA poll)
By Swati Pandey and Wayne Cole
SYDNEY, April 24 (Reuters) - The Australian dollar tumbled to six-week lows on Wednesday and short-term bond futures shot to record highs after surprisingly weak inflation figures boosted betting on a rate cut as early as May.
The Aussie dollar AUD=D3 slid as low as $0.7027, a level not seen since March 11 and threatening support around $0.7000. It was last down 0.9 percent at $0.7037.
The violent reaction came after data showed consumer price inflation was flat in the March quarter, the weakest outcome in three years. measures of underlying inflation favoured by the Reserve Bank of Australia (RBA) averaged 1.4 percent for the year, again missing forecasts and marking 13 quarters below the central bank's target range of 2 to 3 percent.
"With underlying inflation coming in much weaker than expected our base case is now that the first cut will come next month, with the RBA likely to conclude that it's too risky to wait until unemployment starts to trend up," said Shane Oliver, head of investment strategy at AMP Capital.
Earlier this month, the central bank had said it would need to see a sustained rise in the jobless rate to ease. Yet the last time inflation was this weak, in 2016, the RBA quickly reacted with two rate cuts to 1.50 percent. raft of banks from ANZ to ING, JP Morgan and Citi became the latest to predict an easing as early as the next RBA policy meeting on May 7.
A Reuters poll of 17 analysts found 10 now tipped a quarter-point easing in May, a huge shift from the previous poll.
Interest rate futures 0#YIB: showed the probability of a May 7 cut more than doubling to 52 percent. A quarter-point cut was fully priced for July, compared to an October timing earlier this week.
The local stock market .AXJO jumped to its highest in 11 years as investors wagered lower rates would lift consumer demand while burnishing the attraction of stock dividends.
Yields on three-year government bonds AU3YT=RR dived 17 basis points to an all-time low of 1.25 percent, far below the overnight cash rate.
Three-year bond futures YTTc1 surged 15.5 ticks to a record high of 98.755, while the 10-year contract YTCc1 climbed 10.5 ticks to 98.1950.
"The Australia/U.S. two-year bond spread slumped from 91 basis points before the CPI release to 104 bps - the lowest since September 1997," said CBA analyst Joseph Capurso.
"There is a reasonable chance AUD/USD tests $0.7000 during the London and New York sessions."
Across the Tasman Sea, the New Zealand dollar NZD=D3 was caught in the downdraft and slid 0.5 percent to $0.6621, its lowest since early January. The kiwi has fallen or stayed almost flat in nine of the last 10 sessions.
The currency has been in a downward trend since late March after the country's central bank abandoned its long-standing neutral bias to say its next move in interest rates was likely down. inflation data also underwhelmed last week, further boosting the probability of a rate cut.
New Zealand government bonds gained further, with yields down about 5 basis points at the long end of the curve. 0#NZTSY=
(Editing by Richard Borsuk)