The New Zealand dollar dropped after the Reserve Bank opened the door for interest rate cuts as soon as next month with the extension of mortgage loan restrictions set for September.

The kiwi fell to 70.56 US cents from 71.14 cents immediately before the RBNZ release and the trade-weighted index sank to 75.37 from 76.03, still well above the 71.6 quarterly average projected in the June monetary policy statement.

The RBNZ today said it plans to extend mortgage lending restrictions on Auckland property investors to the rest of the country, making them more onerous by requiring a bigger deposit, and reintroducing a uniform national cap on highly leveraged owner-occupier mortgages.

The bank had previously indicated plans to extend loan-to-value ratio restrictions as a means to quell the country's housing market, while at the same needing low interest rates to try and stir inflation.


Traders are pricing in an 80 per cent chance the bank will cut the official cash rate a quarter point to 2 per cent on August 11, and an unscheduled economic update on Thursday is expected to send that signal to the market.

"It's almost like a one, two, three strategy - announce the assessment, announce the LVRs, produce the assessment - all negative for the kiwi," said Imre Speizer, senior market strategist at Westpac Banking Corp in Auckland.

"The kiwi could dip under 70 cents over the day, but I don't think it's going to fall out of bed."

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Westpac's Speizer said the extension of the loan restrictions wasn't a surprise in itself, although it has come earlier than predicted. The market had already priced in one rate cut and will be seeking guidance on how low the OCR could fall in Thursday's update and next month's monetary policy statement forecasts, he said.

"The high TWI and everything else builds a strong case for a sub-2" per cent OCR, Speizer said.

Today's LVR announcement followed weaker inflation data than expected, with June consumer prices rising at an annual 0.4 per cent pace, the seventh quarter below the Reserve Bank's target band of between 1 per cent and 3 per cent.

The Reserve Bank came under pressure from the government for not announcing an extension to the restrictions earlier this month, with policymakers of all hues copping flak as rising house prices are seen as taking property out of reach for much of the population.