The New Zealand dollar dropped, touching a four-year low, after the Reserve Bank abandoned its bias for raising interest rates and said a rate cut was a possibility.

The kiwi fell to 73.27 US cents at 5pm in Wellington and earlier fell as low as 73.18 cents, from 74.52 cents late yesterday. The trade-weighted index declined to 75.83 from 76.79.

Reserve Bank governor Graeme Wheeler kept the official cash rate unchanged as expected but surprised the market by saying the next adjustment could be "either up or down".

The bank hasn't cut the OCR since March 2011 and its tightening bias has been broadly in place since 2013. Inflation could turn negative and was likely to climb back to the middle of the bank's target range "more gradually that previously anticipated."

Advertisement

"We and the market were surprised by the RBNZ unceremoniously dumping its tightening bias today," Stephen Toplis, head of research at Bank of New Zealand, said in a note.

"The downward pressure on the New Zealand dollar will remain significant."
Wheeler today reiterated that the New Zealand dollar was unjustifiably high and its level was unsustainable in terms of the nation's long-term economic fundamentals. He repeated his comment at the December MPS that the bank expects to see "a further significant depreciation."

The New Zealand dollar was little changed after the Federal Reserve reiterated that it would remain "patient" in deciding when to raise interest rates, while noting inflation may decline further.

The Fed's statement came about an hour before the Reserve Bank's 9am announcement.

The Fed said the US economy is on track despite turmoil in other markets around the world, keeping intact expectations that it will raise interest rates from the middle of this year.

The kiwi recently traded at 92.89 Australian cents, down from 93.25 cents yesterday. The local currency fell to 64.96 euro cents from 65.71 cents yesterday. It declined to 48.37 British pence from 49.10 pence yesterday and tumbled to 86.38 yen from 88.03 yen.