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New Zealand's jobless rate hit a nine-year high in the third quarter and the central bank chief warned that the economic recovery was slow and vulnerable, underlining the case to keep interest rates low into next year.
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The New Zealand dollar fell more than half a cent and short-term interest rates rose as investors were slightly less sure that the central bank will start tightening early next year.
"The risk is that unemployment rises faster, employment losses continue, which mutes the recovery and means the Reserve Bank will be moving rates higher later rather than earlier," said UBS senior economist Robin Clements.
The economy shed 17,000 jobs in the third quarter, sending the jobless rate to 6.5 percent, the highest since March 2000, data showed on Thursday, reflecting the lagged impact of the recession on the jobs market.
Last week, the Reserve Bank of New Zealand held its interest rate at a record low 2.5 percent and said there was no urgency to raise rates, which investors took to mean that it would keep it there until the second half of 2010.
That resulted in financial markets scaling back pricing for the first rate rises to March from January next year.
However, separately on Thursday RBNZ Governor Alan Bollard said financial markets would face losses if they continued to expect New Zealand to recover as quickly Australia.
"New Zealand has had a recession, and the pick-up is slower and more vulnerable -- a difference financial markets do not appear to appreciate," Bollard said in notes prepared for a business group.
The New Zealand dollar hit a low of $0.7192 after Bollard's comments, which also prompted a selloff on the cross rate against the Aussie dollar to a three-month low.
Bank bill contract yields moved slightly lower, while swap rates clawed back opening losses to be flat.
But analysts said financial markets are still pricing in 50 basis points of tightening by the end of April because of the expected pick up in the economy.
"The longer he (Bollard) leaves it, the more dangerous it is for him. And the market-thinking is that leaving it till July is too long," said Westpac Bank senior strategist Imre Speizer.
Retail sales, house sales and prices, as well as consumer and business confidence data have pointed to a rebound in the economy, which emerged from recession in the second quarter after five quarters of contraction.
The economy grew 0.1 percent in the second quarter but the RBNZ has said often that the recovery will be slow and uncertain and that markets are have been premature in pricing in rate rises.
Bollard told the business group that New Zealand could benefit from Australia's comparative strength, but markets had to differentiate between the two economies.
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Data is a real-time snapshot *Data is delayed at least 15 minutes