"Watch, worry and wait."

That's Reserve Bank Governor Adrian Orr's assessment after the bank kept its official cash rate at 1.75 per cent.

The Bank surprised no one by leaving its rate unchanged but caught the market off guard by extending the period where it was likely to remain at that level by a year.

The surprise move drove the New Zealand dollar down by a US cent at one point to its lowest level since early 2016 as it dawned on traders that the risks to the economy looked to be skewed to the downside.


While there was no change to the rate, the time extension was seen as the bank becoming more "dovish" - or accommodating - it in its stance.

At a news conference following the release the bank's monetary policy statement, Orr said the risks to the economy were balanced, so that the next move in the OCR could be be up or down.

"We are comfortable where we are," he said. "We will do what central banks do best, which is watch, worry and wait," Orr said.

The OCR has been on hold since November 2016.

Phil Borkin, senior macro strategist at ANZ, said financial markets were caught off guard by the likely duration of the current low interest rate regime.

"I think people are realising that it's going to take a lot for the Reserve Bank to hike from here," Borkin said.

"They are not worried about inflation at all and they are much more worried about the stability and persistence of any growth ," he said.

"And the risks to growth are obviously skewed to the downside at the moment," Borkin said.


In a statement, Orr said that while recent economic growth had moderated, the bank expected it to pick up pace over the rest of this year and be maintained through 2019.

Robust global growth and a lower New Zealand dollar exchange rate would support export earnings, he said.

"At home, capacity and labour constraints promote business investment, supported by low interest rates," he said.

"Government spending and investment is also set to rise, while residential construction and household spending remain solid," Orr said.

There were some "welcome" early signs of core inflation rising.

Inflation will increase towards 2 per cent over the projection period as capacity pressures bite, Orr said.

"This path may be bumpy, however, with one-off price changes from global oil prices, a lower exchange rate, and announced petrol excise tax rises expected," he said.

Orr said the bank would keep the OCR "at an expansionary level" for a considerable period to contribute to maximising sustainable employment and maintaining low and stable inflation.

The central bank revised down its forecast of the average rate of GDP growth in the four quarters to Q1 2019 from 3.1 per cent to 2.6 per cent.

Deputy governor Geoff Bascand said the slightly slower growth in the economy had brought about a change in the bank's thinking.

"We have had slightly slower growth for a while and that means that the expected pick-up in capacity pressure has been delayed," he told the Herald in a phone interview.

"The economy is still doing OK. It is still growing, but it's not growing quite as much as we expected," Bascand said.

"That means that a rise in inflation and a tightening of the labour market is just a bit delayed."

The output gap - a measure of the difference between the actual output of an economy and the output it could achieve at full capacity - would be softer for longer.

"The story we are telling is one of good growth. It's not a story of gloom. It is a story of taking slightly longer to get to a target."

Westpac chief economist Dominick Stephens said it appeared the Reserve Bank had accepted that economic growth is falling short of its previous, bullish forecasts.

"The intensity of the Reserve Bank's reaction today to the slowdown in growth surprised us and financial markets," he said in a commentary.

By late on Thursday the New Zealand dollar was trading at US66.80c - its lowest point since early February 2016 - down from US67.50c just before the release.

The low for the day of US66.60c.