RBNZ unlikely to cut rates anytime soon

The Reserve Bank of New Zealand kept its benchmark interest rate unchanged at 3.5 percent on Thursday, and further signalling it could hold rates for some time although it left the door open for a possible cut.

"Our central projection is consistent with a period of stability in the OCR," RBNZ Governor Graeme Wheeler said in a statement.

The central bank said that it expects inflation to stay lower for longer given the sharp fall in oil prices, but as the economy is showing strong growth, there is no need to revise interest rates.

"It appears that as long as the domestic economy does not show clear signs of weakness and the currency continues to the drift lower, the RBNZ will not have any incentive to cut rates. We continue to believe the RBNZ will keep its policy rate unchanged until early 2016", said Charles St-Arnaud, Economist at Nomura.

New Zealand's economic growth is being driven by strong construction activity, rising household incomes boosted by the drop in fuel prices, low interest rates, and a housing market showing signs of improvement again. However, falling dairy prices, drought conditions in parts of the country, and a high exchange rate are expected to weigh on growth.

"The economic spirit is upbeat," said Cameron Bagrie, chief economist at ANZ Bank New Zealand Ltd. in Wellington. "We are in for a considerable period of unchanged OCR settings, with an eventual resumption of hikes -- but not for a very long time."

NZD/USD hit 0.7389 during in Asia, its highest since March 9 and later consolidated at 0.7408, rising 1.58%. On the downside, support is seen at 0.7249 (March 10 low) levels. On the upside, resistance is located at 0.7519 (March 6 high) levels.

"On a trade weighted basis, the New Zealand dollar remains unjustifiably high and unsustainable in terms of New Zealand's long-term fundamentals," Wheeler said. "A substantial downward correction in the real exchange rate is needed to put New Zealand's external accounts on a more sustainable footing."