The New Zealand dollar and wholesale interest rates fell after the Reserve Bank put to bed the chances of a 50-basis- point rate hike in its official cash rate (OCR) any time soon.
The central bank earlier lifted its OCR by 25 basis points to 0.75 per cent while at the same time dampening down expectations that it would at some point go up by 50 basis points.
A quarter-point move was widely expected but market pricing suggested there was an outside chance of a 50-basis-point hike.
In a summary of the monetary policy committee's minutes, the Reserve Bank said: "The Committee judged that considered steps in the OCR were the most appropriate way to continue reducing monetary stimulus for now."
By late afternoon, the New Zealand dollar was at US69.31c from US69.50 just before the 2pm announcement.
In wholesale interest rates, the one-year swap rate dropped to 1.60 per cent from 1.76 per cent, while the two-year swap dropped to 2.23 per cent from 2.40 per cent.
ANZ strategist David Croy said it was a "relieving" response from the markets.
"The market had really got itself tied up in knots going into this today and the Reserve Bank has allayed a lot of those fears," Croy said.
"The markets went into this fearful that we might get a 50 basis point hike and fearful that the OCR track would lifted to as high as 3 per cent.
"In the event we have seen a 25 basis point hike and the OCR track lifting to only 2.6 by 2024 from (from previous peak 2.1 per cent outlined in the August monetary policy statement).
"All around, I would say that the markets are going to be very relieved by that.
"The Reserve Bank also talked about moving in considered steps going forward, which should put to bed the chances of a 50 basis point hike later on down the track," Croy said.
"Given the role that fear has played in pushing up interest rates and driving up expectations of future policy, it was always expected that we would see some retracement on the back of a 25 basis point hike today," he said.
Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said the market was responding to the "measured and considered" tone of the Reserve Bank's statement.
"They are on a path of tightening and are confirming that with their forecasts, but it will be in considered steps," he said.
"The main message here was that yes, we need to take the OCR above neutral but we can get here with these incremental steps, which really means 25 basis in every MPS," Pepper said.
ASB Bank said it continues to expect a steady 25bp path of OCR hikes for now.
"The NZ economy is not completely out of the Covid-19 woods just yet," the bank said.
"NZ financial conditions (notably mortgage interest rates) have also already tightened materially in recent months and are set to tighten further, that may lessen the need for more aggressive OCR hikes," it said.
"Still, uncertainty remains pronounced and the economy and the OCR could face a number of different paths."