The decision was in line with expectations, but contrary to a global consensus that the rate cycles have peaked markets in New Zealand had recently begun to price in a small chance of a tightening due to stubborn core inflation pressures.

Those slim bets were quashed by the Reserve Bank of New Zealand (RBNZ) as the bank's rate forecast track signalled a slightly more dovish outlook than some traders had anticipated, triggering a selloff in the New Zealand dollar and a rally in bonds.

The RBNZ lowered its forecast cash rate peak to 5.6% from a previous projection of 5.7% - toning down its hawkish stance and effectively reducing the risk of further tightening.

"Core inflation and most measures of inflation expectations have declined, and the risks to the inflation outlook have become more balanced," the RBNZ statement said.

The market had priced in around a 23% chance of a hike this week. The probability of a move by May more than halved to just 6%, from 47% before the announcement. while two-year swap rates dived to 4.995%, from 5.195% and the kiwi dollar was down almost 0.9% at $0.6112 , breaking support around $0.6152.

ASB chief economist Nick Tuffley said that the tone of the statement was not as hawkish as could have been, with the risks now seen as more balanced as opposed to the upward skew noted in November’s statement.

“We think over coming months the hurdle for an OCR move in either direction remains high,” he said.

RBNZ Governor Adrian Orr told a press conference that while the committee had discussed a hike, "there was very strong consensus that the official cash rate right now is sufficient".

In a Reuters poll of 28 economists all but one had forecast the RBNZ would leave the cash rate at a 15-year high for the fourth consecutive meeting.

GLOBAL POLICY IMPULSE

A front-runner in withdrawing pandemic-era stimulus among its peers, the RBNZ has battled to curb inflation, lifting rates by 525 basis points since October 2021 in the most aggressive tightening since the official cash rate was introduced in 1999.

The rate hikes have sharply slowed the economy with recent data showing that it was tracking below previous central bank expectations.

Global central banks, led by the Federal Reserve, have recently pushed back against market expectations for an early start to rate cuts given persistent inflationary pressures.

The RBNZ's statement was broadly in tune with global concerns about prices, reiterating that it needs to keep policy restrictive for a while in order to bring inflation below the top-end of its 1% to 3% target band.

The central bank noted a global impulse towards holding policy tighter for longer.

"A more general risk to global growth is that central banks may need to keep policy interest rates at restrictive levels for longer than currently reflected by financial market pricing, to ensure that inflation targets are met," the RBNZ statement said.

The central bank also flagged geopolitical risks and a slowdown in China's economy as challenges for policy.

New Zealand's annual inflation has come off in recent months and is currently running at 4.7% with expectations that it will return to its target band in the second half of this year.

ANZ, which was alone in predicting a hike this week, said in a note the overall tone of the statement was not nearly as hawkish as they had anticipated.

"The evidence threshold for the RBNZ committee is clearly much higher than we appreciated, so we have reluctantly parked further hikes back in the risk basket, pushing cuts out to mid-2025," ANZ chief economist Sharon Zollner said.