The New Zealand dollar tumbled after the Reserve Bank adopted a bias for holding interest rates steady through 2019, and also said it wanted the currency to weaken.
The kiwi dropped 1 per cent to just below $US72¢ and was fetching US72.02¢ in late trade. It also came under pressure against the Australian dollar, with the Aussie jumping more than 1¢ to $NZ1.0586 late in the session.
It wasn't until the last sentence in the policy statement where the central bank signalled a shift: "Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly."
In an accompanying table, the bank forecast the official cash rate will hold at 1.8 per cent (1.75 per cent rounded up) through June 2019, edging to 1.9 per cent by September 2019 and to 2 per cent by March 2020.
"The outlook for the OCR is more dovish than the market had expected," said NAB director of economics David de Garis. "The market had been priced for 1½ hikes from the RBNZ over the next 12 months (37 bps), but this morning's RBNZ OCR track has it steady not only through this year and next and not hiking until 2019.
"As a dampener on the inflation outlook, the RBNZ said the NZD remains higher than sustainable for balanced growth, endeavouring to talk it down in the process," Mr de Garis said.
The central bank said the Kiwi's trade-weighted index was currently about 4 per cent higher than forecast in the RBNZ's November statement, reflecting low global interest rates.
As global rates slowly rise – the US has already started lifting, the corresponding narrowing of interest rate differentials is assumed to lead to "a gradual depreciation of the New Zealand dollar", the bank said. The TWI increased about 7 per cent in 2016; it is forecast to peak at 79 in the current quarter before drifting to 75.9 in mid-2019.
"Admittedly, [Reserve governor Graeme] Wheeler's jawboning lacks teeth (pardon the pun) without an OCR track to back his easing bias up," RBC Capital Markets currency strategist Michael Turner said. "But as the housing market slows and takes headline growth with it, we see room for further easing. We continue to pencil in May."
In its statement, the bank said global monetary policy was expected "to remain stimulatory, but less so going forward, particularly in the US".
As for New Zealand, the bank said "financial conditions have firmed with long-term interest rates rising and continued upward pressure on the New Zealand dollar exchange rate.
"The exchange rate remains higher than is sustainable for balanced growth and, together with low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed."
So where is the Kiwi heading?
"Overall, the financial markets may need to adjust their view that rates will be raised by 0.25 per cent at least once this year and twice next year," according to Paul Dales at Capital Economics. "That should help weaken the dollar from US72¢ cents to US60¢."