Dollar rallies after Reserve Bank OCR hold

File photo / NZ Herald

The New Zealand dollar rallied by more than US1c today after the Reserve Bank opted to keep its official rate at 3.5 per cent.

Expectations had built up that the bank might hint at an easing bias in future, but analysts said Reserve Bank Governor Graeme Wheeler instead showed that policy would remain neutral.

"Our central projection is consistent with a period of stability in the official cash rate," Wheeler said. "However, future interest rate adjustments, either up or down, will depend on the emerging flow of economic data," he said in a statement.

The New Zealand dollar went from US71.90c just before the 9 am announcement to just under US73c shortly after.

Bank of New Zealand currency strategist Kymberly Martin said there was an expectation that the Reserve Bank, while keeping the rate on hold, would nevertheless adopt a softer tone.

"They are explicitly saying that they are now neutral, so they are not specifically hinting at any cuts in the future, and that any future move would be data-dependent - up or down," Martin said.

Over the last two trading days, the Kiwi had been under downward pressure from continued strength in the US dollar and fallout from the 1080 formula contamination scare.

Martin said the 1080 scare was now no longer a factor in trading.

In its statement, the bank repeated its message that the New Zealand dollar was too strong.

"On a trade-weighted basis, the New Zealand dollar remains unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals," it said.

"A substantial downward correction in the real exchange rate is needed to put New Zealand's external accounts on a more sustainable footing," it said.