Reserve Bank holds its hand - leaves rates 2.5pc

Reserve Bank Governor Graeme Wheeler was expected to leave the Official Cash Rate unchanged this morning. Photo / Mark Mitchell

The Reserve Bank has left its official cash rate unchanged at 2.50 per cent but has hinted heavily that more rate cuts may be necessary later this year.

The bank said in a statement: "Some further policy easing may be required over the coming year to ensure that future average inflation settles near the middle of the target range."

Prices for a range of commodities, particularly oil, remain weak. Financial market volatility has increased, and global inflation remains low.

The domestic economy softened during the first half of 2015 driven by the lower terms of trade.

"However, growth is expected to increase in 2016 as a result of continued strong net immigration, tourism, a solid pipeline of construction activity, and the lift in business and consumer confidence," it said.

The bank also noted that the New Zealand dollar had declined but that there was room for it to fall further. "A further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices," it said.

The central bank cut its official rate four times in the second half of last year to 2.50 per cent - its lowest ever point.

Dollar falls after Reserve Bank statement, Fonterra

The New Zealand dollar fell by close to US1c after Fonterra cuts its farmgate milk price forecast and the Reserve Bank hinted heavily that more official rate cuts were to come this year.

The Kiwi started to fall at around 8.30 am when Fonterra announced that it had cut its farmgate milk price forecast for the 2015/6 season to $4.15 a kg of milksolids from a previous forecast of $4.60 a kg, going from around US65.05c to US64.80c.

The fall gained more momentum when the Reserve Bank kept its official cash rate unchanged at 2.50 per cent but adopted an explicit easing bias, the currency going as low as US64.20c.

Sam Tuck, senior foreign exchange strategist at ANZ Bank, said the markets focused on the "further policy easing" comment.

"There was an upgrading of the language and a much more explicit easing bias than was the case at the last statement December, when the markets saw rates being kept on hold," he said.