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RBNZ holds rates, retains easing bias amid weak inflation

New Zealand's central bank kept its benchmark interest rate unchanged on Thursday at 2.25 percent but reiterated further easing may be needed given weak inflation.

"Monetary policy will continue to be accommodative. Further policy easing may be required to ensure that future average inflation settles near the middle of the target range," said Governor Graeme Wheeler in a statement.

However, the central bank governor also noted that inflation is expected to strengthen as the effects of low oil prices drop out and as capacity pressures gradually build.

He said the bank will remain closely focused on economic data.

Wheeler emphasized there are "many uncertainties" around the outlook. Internationally these relate to prospects for global growth, particularly around China. The main domestic risks relate to weakness in the dairy sector, the decline in inflation expectations, the possibility of continued high net immigration and pressures in the housing market, said Wheeler.

The New Zealand dollar climbed as far as $0.6935 from around $0.6850 in reaction to the policy decision.

Wheeler underscored that the exchange rate remains higher "than appropriate" given New Zealand's low commodity export prices.

"A lower New Zealand dollar is desirable to boost tradables inflation and assist the tradables sector," said Wheeler.

Economists are still expecting the central bank to cut the rate in June.

"He's kept his cards close to his chest. He's certainly kept the prospects of further easing alive in June, the door certainly remains open to that," said ANZ Senior Economist Philip Borkin.

ASB Chief Economist Nick Tuffley also still expects a cut in June.

He notes, however, the statement "gives little added urgency relative to that of March's, and no hint that the RBNZ is currently anticipating a need for the OCR to drop below the 2 percent level the RBNZ's forecasts currently imply."

Eighteen economists polled by Reuters had expected the Reserve Bank of New Zealand (RBNZ) to keep rates on hold while six had forecast a rate cut.

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