"They think the evolution of the data is going to lead to OCR cuts," Stephens said.
"A possible impediment to that pricing was the possibility the central bank would come out and say, 'No, no that is not what we are thinking'. That's gone. The bank seems pretty open. So markets are free to price according to their own assessment of future conditions."
The international context is one where faltering growth in important parts of the global economy (the United States being the conspicuous exception), combined with a collapse in oil prices, has resulted in a strong ebb tide running in interest rates.
"The Reserve Bank has effectively thrown its hands in the air and given the market the green light to respond to the data-flow as it sees fit," said ANZ chief economist Cameron Bagrie.
"In a month where the Swiss National Bank has abandoned its peg [to the euro] and the central banks of both Canada and Singapore have surprised the markets with cuts, the Reserve Bank is going with the global flow - as far as a still-strong domestic economy will allow," Bagrie said.
"Looking forward, we have a flat profile for the OCR, with risks tilting to the downside, but not yet concrete enough to warrant a cut call."
The Bank of New Zealand's head of research, Stephen Toplis, said yesterday's review of the OCR was a test of what the Reserve Bank was more concerned about: the ongoing strength of the New Zealand dollar or a housing market threatening to get out of control again.
Toplis concludes that it is the dollar and that the bank is prepared to take a "premature gamble" with the housing market.
In its December statement the Reserve Bank was still sanguine about the risks of house price inflation, forecasting less than 5 per cent per annum nationwide over the next three years. More recent data will have challenged that view and it now acknowledges the housing market is "showing signs of picking up, particularly in Auckland".
Stephens said that with the OCR pinned down at 3.5 per cent by low inflation a resurgent housing market would leave the Reserve Bank with only one option, further regulatory tightening. ASB chief economist Nick Tuffley said that while he no longer sees interest rate hikes as likely in the foreseeable future, the threshold for a cut to the OCR is high, given record-high net migration, accelerating house price inflation in Auckland, relatively high terms of trade, the recent fall in oil prices, high levels of confidence, an above-trend economic growth outlook and falling unemployment.
"Any catalyst for a cut would most likely be an adverse global development," Tuffley said.
"That certainly can't be ruled out given the fluid global environment, as even the past weekend's Greek election emphasised."
Bank move pulls kiwi lower against greenback
The New Zealand dollar dropped by more than US1c after the Reserve Bank abandoned its previous tightening bias and left the door open for future interest rate cuts.
As expected, the bank kept its official cash rate at 3.5 per cent at yesterday's review but the real news for the market was the bank's comment that it expected to keep the rate on hold for some time.
"Future interest rate adjustments, either up or down, will depend on the emerging flow of economic data," the bank said.
The currency was already under a little pressure just before the release when players were caught off guard by the dovish tenor of Reserve Bank governor Graeme Wheeler's comments.
The kiwi dropped from US74.30c just before the 9am announcement to US73.15c soon after. At that point, it was the lowest the kiwi had been since March 2011.
"Even though people had been expecting some watering down of the tightening bias, they were not anticipating a complete abandonment of it, which is what we got today," Raiko Shareef, Bank of New Zealand currency strategist, said.
The BNZ expects the currency to reach US70c by the end of year, but with an accelerated decline in the first half as expectations of a rate cut start to build.
"While we don't think a cut will be delivered, I think the market will ignore the fact that the economy is quite strong," Shareef said.
Many had expected the Reserve Bank to at least wait untilits next quarterly monetary policy statement on March 12 before dropping its tightening stance.
Once again, the Reserve Bank opened fire on what it still considers to be an overvalued currency, despite its steep decline against the greenback since July last year.
"While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand's long-term economic fundamentals," Wheeler said.
The currency has dropped by about US15c, or 17 per cent, since last July, when it came very close to surpassing its post-float high of US88.40c.
Additional reporting by Jamie Gray
