RBNZ flags possible rate cut

The Reserve Bank of New Zealand has kept the official cash rate unchanged at 3.5 per cent at its latest review, but is signalling a cut may be on the cards.

Governor Graeme Wheeler has dropped a reference to the possibility of rate hikes he made last month at the monetary policy statement.

Inflation is sitting at about 0.3 per cent and Mr Wheeler said the timing of future adjustments would depend on inflationary pressures.

"It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target," he said.

The bank is charged with keeping inflation between one and three per cent target band.

The change of tone from Mr Wheeler was expected after assistant governor John McDermott said last week that the bank isn't currently considering any increase in rates.

"The bank expects to keep monetary policy stimulatory, and is not currently considering any increase in interest rates," Mr Wheeler said.

The kiwi dollar dropped to 76.03 US cents from 76.91 cents just before the release.

He said the local economy was continuing to grow at an annual rate of around three per cent.

It was supported by low interest rates, high net immigration and construction activity and declining fuel prices.

But he again pointed to the high NZ dollar providing economic headwinds.

"The New Zealand dollar continues to be unjustifiably high and unsustainable in terms of New Zealand's long-term economic fundamentals.

"The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome," he said.

ASB chief economist Nick Tuffley said the odds of an OCR cut may be 50:50.

"At this point we are not explicitly forecasting an OCR cut, but are very close to the line," he said.

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