New Zealand's central bank kept interest rates steady on Thursday as expected but voiced concern about the rising New Zealand dollar, suggesting the bank may cut rates again at its next meeting.
The trade-weighted New Zealand dollar, which the RBNZ looks at when reviewing monetary policy, has rallied nearly 10 percent in the past month partly as markets priced in the likelihood of a pause in the easing cycle.
"The exchange rate has been moving higher since September, which could, if sustained, dampen tradables sector activity and medium-term inflation," Reserve Bank of New Zealand governor Graeme Wheeler said in a statement.
"This would require a lower interest rate path than would otherwise be the case," he said.
The RBNZ left the official cash rate unchanged at 2.75 percent, having delivered three cuts in a row.
The decision came just hours after the U.S. Federal Reserve put a December tightening firmly in play following a widely expected decision to keep interest rates unchanged.
After the RBNZ announcement, the kiwi briefly dropped around half a cent as far as $0.6622 before reversing its losses and rising to $0.6685. It was still down around 1 percent on the day, however, on renewed expectations that the Fed could raise rates in December.
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"If the currency remains high, it's likely they'll need to cut rates to offset the impact that the high New Zealand dollar is having on the inflation outlook, and they made that pretty clear to all and sundry," said Nick Tuffley, chief economist at ASB.
New Zealand's economy has been struggling this year with falling global dairy prices and volatility in China, the pacific nation's largest trading partner.
China's central bank cut interest rates on Friday for the sixth time in less than a year, and it again lowered the amount of cash that banks must hold as reserves in a bid to jump-start growth in its stuttering economy.
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Gains in tourism and immigration, which have led to strength in New Zealand's service sector, as well as some recovery for dairy prices had been an encouraging recent development.
But the RBNZ said that it was too early to say whether improvements would be sustained.
It also noted that inflation remains below its target range and was expected to return to well within that range by early next year.
"To ensure that future average CPI inflation settles near the middle of the target range, some further reduction in the OCR seems likely," the central bank said in a statement.