SYDNEY (Reuters) - The New Zealand dollar inched higher on Wednesday after the country's central bank skipped a chance to cut interest rates, though it signalled another easing was likely given economic risks at home and abroad.
The kiwi firmed to $0.6550, from $0.6536, after the Reserve Bank of New Zealand held the official cash rate at 1.5% at its policy meeting. A move had not been widely expected given it cut by a quarter point back in May.
Still, the tone was unmistakably dovish with minutes showing the policy-making committee discussed whether to ease at the meeting and agreed a move would likely be needed in time.
Markets imply around a 63% chance of a reduction to 1.25% at the RBNZ's next meeting on August 7, and are wagering heavily on 1% by year end.
"Given the tone of this statement, we remain of the view that the RBNZ will most likely cut the OCR in August," said Dominick Stephens, Westpac's chief economist in New Zealand.
"The repeated comment that a lower OCR may be needed is blunter than the language used in March, which was followed by a cut in May."
Many analysts suspect the bank has little choice in easing given the Reserve Bank of Australia (RBA) is widely expected to cut rates at its policy meeting next week, and the Federal Reserve is considered likely to ease in July as well.
Were the RBNZ not to follow, it would likely put unwelcome upward pressure on the kiwi and lessen the competitiveness of New Zealand's exports.
The bond market is already far ahead of the central bank having driven yields on two-year paper near all-time lows at 1.15%.
Yet while markets have priced in almost 50 basis points of further cuts by the RBNZ in the year ahead, they already imply more than twice as much easing by the Fed.
That outlook has helped put a floor under the kiwi since it touched a seven-month trough of $0.6482 in late May.
The market is wagering the RBA will cut rates by 50 basis points to 0.75% by the end of this year, but again this looks almost restrained compared to expectations for the Fed.
The Australian dollar has likewise managed to steady around $0.6965, after diving as deep as $0.6832 earlier this month. It faces major resistance around $0.7025, however, which will likely contain it for now.
Again a lot of easing is already in the price, with Australian three-year bond yields only a whisker above record lows at 0.925%.
The 10-year bond future hit an historic high in early trade before dipping 2.5 ticks to 98.7150, implying a yield of 1.285%.
(Editing by Shri Navaratnam)
