UPDATE 2-NZ central bank sees rates on hold until H2, 2010

* Central bank keeps rate at record low 2.5 percent

* Central bank says no rush to hike, to stand pat until H2

* Governor sees challenges to economy, inflation on target

* Kiwi falls, markets pare back rate hike expectations

* Poll shows half of analysts expecting Q2 rate rise (Adds poll, details, updates market reaction, comment)

WELLINGTON, Oct 29 - New Zealand's central bank said on Thursday it expected to hold interest rates at a record low at least until July, quashing speculation an economic rebound would lead to tightening as early as January.

The Reserve Bank of New Zealand (RBNZ) dropped its easing bias and left the benchmark rate at 2.5 percent as expected. The signal the bank was in no rush to hike sent the New Zealand dollar and market interest rates sharply lower.

All 18 economists polled by Reuters had expected no change.

A string of data -- retail sales, house sales and prices, consumer and business confidence -- has pointed to a rebound in the economy, which emerged from recession in the three months to June 30 after five straight quarters of contraction.

RBNZ Governor Alan Bollard said the economy was not yet out of the woods.

"There remain significant vulnerabilities and challenges to be worked through in many economies. This process could weigh on global growth going forward," Bollard said in a statement.

"In contrast to current market pricing, we see no urgency to begin withdrawing monetary policy stimulus, and we expect to keep the OCR at the current level until the second half of 2010," Bollard said.

Bollard had previously committed to keeping rates steady until the "latter part" of next year, a rephrasing that suggested to some economists that a rate hike was envisaged as early as July instead of perhaps the fourth quarter.

The central bank cut rates seven times between July last year and this April by a total of 575 basis points to help the battered economy.

KIWI DOLLAR FALLS, SWAPS DOWN

The New Zealand dollar <NZD=D4> fell around half a cent to a four-week low of $0.7196 after the rate decision, before settling around $0.7217. Bank bill futures <0#NBB:> jumped as markets reduced the chances of an earlier rate rise.

Interest rate swap yields fell between nine and 16 basis points, causing the yield curve to steepen.

The two-year swap rate <NZDSM3NB2Y=> dropped to 4.50 percent, from 4.63 percent before the announcement and a high of 4.82 percent earlier in the week.

"The market has pared back their expectations. The statement is more dovish than the market has been anticipating," said RBC Capital Markets senior economist Su-Lin Ong.

"Obviously it's clear rates can't stay at 2.5 percent for ever and the run of data in New Zealand suggests they will have to rise next year. We see the second quarter as likely timing for the first hike," she added.

Markets, which had priced in 25-basis-point rate rises in both January and March <NZDOIS>, have now retreated to bet on a first hike in March.

A Reuters poll taken after the rate decision showed all 14 economists expected rates to remain on hold at the Dec. 10 review, with five expecting a hike in the first quarter of 2010, seven in the second quarter and two in the third quarter.

However, most expect aggressive rate hikes when the tightening cycle begins next year. [NZ/POLL]

Domestic data this month also showed stronger-than-expected price pressures, with consumer prices rising 1.3 percent in the third quarter, but Bollard said inflation was expected to remain comfortably within the RBNZ's 1-3 percent target range in the medium term.