The NZ dollar dropped by about three quarters of a US cent and fell sharply against the Aussie after the Reserve Bank gave a far more dovish than expected message at it latest review of the official cash rate.

Soon after the 9am release of the Reserve Bank's statement, the currency was at US68.50, down from US$69.25 just before.

Against the Aussie the kiwi at A93c.1, down by one Australian cent.

"It's been a big surprise," Jason Wong, currency strategist at BNZ said. "Everyone thought that they would be raising the inflation forecast track."


The Reserve Bank of New Zealand held the official cash rate at 1.75 per cent, saying major challenges remain with ongoing surplus capacity and global political uncertainty.

While no change to the official cash rate (OCR) was expected, markets had anticipated that renewed inflation pressure would see the Reserve Bank move forward its forecasts for future rises.

Instead it retained a neutral stance.

"Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy," Wheeler said.

Stronger global demand has helped to raise commodity prices during the past year, which has led to some increase in headline inflation across New Zealand's trading partners, he said. However, the level of core inflation has generally remained low.

"The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead," he said.

"Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 per cent."

Economists were expecting an interest rate hike to be signalled sooner than in its last MPS three months ago.


ANZ senior economist Phil Borkin said: "Clearly it was more dovish than expected. They remain absolutely stuck in neutral.

"he main message from them is that we are not budging policy for a considerable period. They are looking through the recent developments and still focusing on a lot of uncertainties out there."

At the February policy statement, Wheeler said rates could go either way in the future with the looming prospect of new trade barriers creating too many uncertainties for the central bank.

"We expect the RBNZ to keep the OCR on hold at 1.75 per cent but with a stronger signal that the next move will be up," said Imre Speizer, senior markets strategist at Westpac, in a preview note.

"It will need to acknowledge how conditions have changed in the last three months, with notable positives being the jump in inflation, drop in [NZ dollar trade weighted index], and higher dairy prices. We expect OCR projections to be shifted in a hawkish direction, implying a rate hike in late 2018 (compared to late 2019 in March's MPS)."