UPDATE 2-New Zealand central bank keeps rate steady, kiwi jumps

Published: 10 Jun 2009 18:34:51 PST

* NZ's central bank holds key rate at 2.5 percent

* The first rate pause in almost a year

* RBNZ says further rate cut possible

* RBNZ repeats pledge to keep rates low through 2010

* NZ dollar gains, debt sold after decision (Adds poll, details, comment, market reaction)

WELLINGTON, June 11 - New Zealand's central bank kept its key interest rate steady at a record low 2.5 percent on Thursday and pledged to keep it there through next year, a move seen ending its aggressive easing cycle to combat recession.

The Reserve Bank of New Zealand (RBNZ) also warned the recent rise in the New Zealand dollar <NZD=> could stifle fledgling signs of economic recovery that are now showing through, but said direct moves to bring it lower would likely have little effect.

Governor Alan Bollard ruled out any central bank intervention to bring the local currency lower because it would not help in the medium term, but said the huge current account deficit could put downward pressure on the New Zealand dollar, or the kiwi.

"In time, we expect a renewed focus on domestic developments, particularly New Zealand's stretched external position, to put downward pressure on the New Zealand dollar," he said.

New Zealand's current account deficit of almost 9 percent of GDP was twice as much as Australia's deficit and more than three times that of Ireland, which nearly had its banking system wrecked by the global financial crisis.

The New Zealand dollar <NZD=> rallied more than 1.2 percent to around $0.6330/40 after the rate decision, while swap yields rose with the two-year rate <NZDSM3NB2Y=> 22 basis points higher at 3.78 percent and the five-year swap <NZDSM3NB5Y=> gaining 26 basis points to 5.30.

The kiwi also rose to a four-day high against the Australian dollar <NZDAUD=R>. New Zealand's rates fell below Australia's key rate for the times in April since December 2003.

Since early March, the kiwi has risen 26 percent against the U.S. dollar as signs of stabilisation in financial markets prompt investors to slowly move back into riskier, higher yielding assets.

For a graphic on the rate decision and market reaction double click; http://graphics.thomsonreuters.com/069/NZ_RTS0609.jpg

Bollard said further, small rate cuts were possible, but the no change decision was seen as the end of the aggressive easing cycle, during which the central bank slashed the cash rate by 575 basis points since last July from a record high 8.25 percent.

"The RBNZ has rightly kept the door open, but our view is that, given what we've seen globally and locally, we would be surprised if we required further rate cuts from here," said Goldman Sachs JBWere senior economist Bernard Doyle.

The RBNZ said there were bright spots appearing for the economy for the first time in some months, though the risks remained weighted to the downside.

"We therefore consider it appropriate to continue to provide substantial monetary policy stimulus to the economy," Bollard said.

Some analysts had said the need to contain the currency's strength could force the RBNZ's hand to cut rates.

BRIGHT SPOTS

The RBNZ also said it expected the large amount of interest rate cuts so far to filter through to more borrowers over coming quarters as existing fixed-rate mortgages come up for repricing.

"Although rising longer-term interest rates overseas are placing upward pressure on longer-term lending rates here, there is room for further reductions in shorter-term lending rates," Bollard added.

As widely expected, the central bank reiterated its pledge to keep the official cash rate (OCR) at or below 2.5 percent until at least the latter part of 2010.

Analysts also now expect the central bank to maintain its key rate at 2.5 percent at the next review on July 30. A Reuters poll after Thursday's move showed 13 out of 15 economists expect no change in the key rate at the July 30 review, and will remain at the same level at least until the first quarter of 2010. See [ID:nWLF001368]

New Zealand has been in recession since the start of last year, the longest contraction in more than 30 years, and the downturn is expected to last through much of the year.

Separately, data showed New Zealand's manufacturing and housing sectors were levelling out after sharp declines, echoing trends seen in some other parts of the world which have spurred optimism that the worst of the global downturn may be over.

The RBNZ has chopped its OCR by a massive 575 basis points since July 2008. The rate compares with official rates of 3.0 percent in Australia, 0.1 percent in Japan, 1.0 percent in the euro zone and 0-0.25 percent in the United States.

LINKS > Analysts' comment on NZ rate [ID:WEL415290] > NZ central bank leaves cash rate unchanged [ID:nWEL000925] > Central bank policy statement [ID:nWEL000926] > POLL-RBNZ July official cash rate review [ID:nWLF001368] > NZ house prices flat, sales rise in May [ID:nWEL000927]

> NZ manufacturing falls for 13 month in May [ID:nWEL476744] (Additional reporting by Gyles Beckford and Adrian Bathgate)