The Reserve Bank has signalled that the next move in interest rates is still likely to be up, not down, but will come later than the midyear it foreshadowed last month.
"Given ongoing uncertainty around global conditions and the moderate pace of domestic demand, it remains prudent to keep the OCR on hold at 2.5 per cent," governor Alan Bollard said in the bank's official cash rate review yesterday.
That was a verbatim repeat of what he said in December, apart from dropping the phrase "for now".
The omission was significant, Westpac chief economist Dominick Stephens said.
"It removes the sense of impending hikes that was conveyed by the December monetary policy statement, which projected a gradual rise in the OCR from around June this year."
It was broadly the message the market was expecting - a later start to rate hikes but not a marked change in the bank's stance - and "far less dramatic than the US Federal Reserve's commitment to keep rates at zero until at least late 2014, which pushed the New Zealand dollar a cent higher this morning", Stephens said.
ANZ economist Mark Smith said the Federal Reserve's move effectively gave a green light for a weaker US dollar and by implication a stronger New Zealand dollar.
All else being equal it would allow the Reserve Bank to keep rates low for longer, but it was unhelpful from the standpoint of New Zealand's need to rebalance towards a more export-driven economy.
Bollard noted the recent rise in the kiwi was reducing exporters' returns, though export commodity prices remain high.
The high exchange rate is partly the product of improved sentiment in global financial markets.
While Bollard acknowledged improved liquidity in European financial markets - boosted by a large injection of cheap money by the European central bank last month - he repeated warnings of the likelihood of pressure on New Zealand banks' funding costs over the coming year because of their reliance on offshore wholesale funding.
Smith said ANZ's analysis suggested elevated funding costs would knock about 1 per cent off growth in New Zealand over the year ahead. "We are closely watching deposit rates. If competition escalates and rates start to rise, the case for an OCR cut will strengthen," Smith said.
The Reserve Bank continues to forecast "modest" growth for the domestic economy, with signs of a "limited" recovery in household spending and the housing market, though it said there might be further delays to the rebuilding of Christchurch following the pre-Christmas aftershocks. It said the inflation picture was "reassuring".
The December quarter's inflation data were much weaker than expected at the headline level and the measures of underlying inflation were close to the 2 per cent mid-point of the bank's target band.
Statistics New Zealand's downward revision to the historical track for gross domestic product meant the starting point level of economic activity late last year was significantly lower than previously thought.
And the New Zealand Institute of Economic Research's December quarterly survey of business opinion was downbeat.
Stephens said the boost to demand created by repairs and reconstruction in Canterbury still lay at the heart of the case for higher interest rates, and it was unclear whether the latest swarm of aftershocks would have an impact on the timing.
He said yesterday's statement still left the Reserve Bank much more hawkish over market pricing, which implied no rate hikes until well into next year.
"This difference of opinion is likely to remain until we have some resolution on Europe's debt crisis and clear signs that reconstruction in Canterbury is boosting domestic demand ... A gradual increase in the OCR starting from September still looks like a reasonable prospect."