The New Zealand dollar jumped 1.3 percent against the greenback after the Reserve Bank kept interest rates unchanged and repeated that easing may be required to get inflation back to its target while also noting a pick-up in house price inflation.
The kiwi jumped to 69.30 US cents after the central bank statement, from 68.44 cents immediately before the 9 a.m.release and from 68.81 cents late yesterday. The trade-weighted index rose to 73.34 from 72.46 before the statement. The two-year swap rate rose as much as 6 basis points to 2.26 percent.
Today's statement keeps alive the prospect that governor Graeme Wheeler will cut the official cash rate a quarter point to 2 percent at the June 10 monetary policy statement, although his language today was no more emphatic about easing than in March, when he surprised the market with a quarter-point cut.
However, he did note today that house price inflation may be picking up in Auckland, having said it was moderating last month, and repeated that pressures were building in other regions.
"Having been surprised back in March, the market was open to the possibility of being surprised again," said Darren Gibbs, chief economist at Deutsche Bank. "There's still very much an explicit easing bias. The base case is one rate cut yet to be delivered, maybe in June but it could be in August."
A change in scheduling of monetary policy statements means they are to be given on June 9 and August 11. The change was announced last August and means the MPS is released in February, May, August and November each year, rather than the older pattern of March, June, September, and December as part of a wider rationalisation of publishing dates.
Gibbs said he didn't agree a further rate cut is required, given there has been an improvement in the global situation since the March policy statement, dairy product prices have improved and both economic growth and inflation have picked up. Waiting until August would give the central bank even more data to base its decision on.
"It's hard to know why the market thought there was a rate cut in prospect today," he said. While Wheeler pointed to house price pressures, he stopped short of hinting at further macro-prudential controls, instead giving a "somewhat bland" commentary.
Wheeler's announcement came three hours after the US Federal Reserve released the statement from its latest policy review.
The Federal Open Market Committee kept the target range for its overnight lending rate at 0.25 percent to 0.5 percent, as expected, noting an improvement in the US labour market and saying it remained confident inflation would rise to its 2 percent target over the medium term. It dropped a reference from its previous statement about global economic and financial risks but added it was closely monitoring offshore developments.
Traders are now awaiting the Bank of Japan's statement later today.
The kiwi rose to 91.09 Australian cents from 90.12 cents late yesterday. It gained to 47.58 British pence from 47.16 pence and rose to 61.07 euro cents from 60.83 cents. The local currency climbed to 77.13 yen from 76.37 yen and rose to 4.4932 yuan from 4.4628 yuan.