The New Zealand dollar has rallied after what the markets perceived as a more optimistic view of the economy from Reserve Bank Governor Graeme Wheeler.

Soon after the release of Wheeler's speech notes to a private briefing at 9 am, the already strengthening Kiwi went from US66.90c to US67.20c.

Foreign exchange dealers said the tone the speech was much less pessimistic than the market had priced in.

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Wheeler said some local commentators had predicted large declines in interest rates over coming months that could only be consistent with the economy moving into recession.

"We will will review our growth forecasts in the September monetary policy statement, at this point, we believe that while demand and output growth may be a little below trend, several factors are supporting economic growth," Wheeler said.

"These include the easing in monetary conditions, continued high levels of migration and labour force participation, ongoing growth in construction and continued strength in the services sector," he said.

Broadly speaking, the economic outlook is deemed (by Wheeler) to be a little bit more optimistic than the markets had expected, continuing the theme that we saw in the official cash rate statement, which was one of not being as pessimistic as the markets would like," Sam Tuck, senior foreign exchange strategist at ANZ Bank, said.

ASB Bank chief economist Nick Tuffley said Wheeler's speech reinforced that further easing is likely, but also explicitly dampened the more exuberant rate cut expectations.
"We remain comfortable with our view the Reserve Bank will cut the official cash rate by 25 basis points both September and October, to 2.5 per cent," Tuffley said in a commentary.

Elswhere in his speech, Wheeler said some further monetary policy easing is likely to be required to maintain New Zealand's economic growth around its potential, and return consumer price inflation to its medium-term target level.

Further exchange rate depreciation is necessary, given the weakness in export commodity prices and the projected deterioration in the country's net external liabilities over the next two years, Wheeler said.

Read the speech here: