The New Zealand dollar tumbled 1.2 percent against its trading partners and interest rate swaps fell after the Kiwi central bank said rates would stay at record lows for up to a year longer than previously indicated.
The kiwi fell to 66.73 US cents as at 5pm from 67.50 cents at 8am and 67.53 cents yesterday. The trade-weighted index dropped 71.80 from 72.68.
New Zealand's two-year swap rate fell 7 basis points to 2.03 per cent while 10-year swaps were down 9 basis points to 2.92 per cent.
The moves came after the Reserve Bank kept the official cash rate at 1.75 per cent as expected but pushed out its forecasts to show the OCR rate lifting to 1.9 per cent in September 2020 versus a prior projection of September 2019.
A full rate hike is now signalled by December 2020, when the benchmark rate is forecast to be 2 percent. The central bank had previously indicated it would reach that level in March 2020.
Governor Adrian Orr also kept the door open to a rate cut, reiterating that the next move could be up or down.
The kiwi was also sharply weaker against the Australian dollar as the two central banks' policy tracks diverge, trading at 89.74 from 90.91 cents yesterday. Yesterday, Reserve Bank of Australian governor Philip Lowe essentially ruled out a rate cut across the Tasman.
The change to the New Zealand central bank's forecasts were "a surprise after a long time without any surprises from the Reserve Bank," said Imre Speizer, head of NZ strategy at Westpac Banking Corp.
"The market was very short, it is now shorter still," he said. Going short means betting a currency will decline and can be bought back at a cheaper price.
Speizer said the central bank's main focus was on softening economic growth as opposed to emerging signs of inflation.
"It was all about growth," he said, adding that the RBNZ "may have lurched too far (in its view on softening growth) and the market lurched with it." As a result the kiwi may find some support around current levels.
Westpac Banking Corp NZ chief economist Dominick Stephens said "while we agree that growth has passed its peak, we think that the RBNZ has actually overplayed the near-term softness angle."
While the central bank is expecting quarterly gross domestic product growth of 0.5 per cent in the June quarter, Stephens said it might be closer to 1 per cent.
GDP data are due September 20.
The kiwi fell to 4.5521 Chinese yuan from 4.6055 yuan yesterday and dropped to 51.83 British pence from 52.14 yesterday. It declined to 57.48 euro cents from 58.10 cents yesterday and fell to 73.94 yen from 75.13 yen.