By Praveen Menon and Charlotte Greenfield
WELLINGTON (Reuters) - New Zealand's central bank surprised investors by holding interest rates at an all-time low of 1% on Wednesday saying it saw no urgency to ease policy further, sending the kiwi dollar sharply higher.
Increases in wage growth and non-tradable inflation together with a weaker local dollar helped by a surprise 50 basis point cut in August, aided the Reserve Bank of New Zealand's (RBNZ)decision.
A majority of economists polled by Reuters had tipped an easing in the final policy meeting for the year.
Wednesday's call not to cut startled doves, sending the kiwi more than 1% higher to $0.6422. If gains are sustained, this would be biggest one-day percentage rise since late January.
Yields on two-year New Zealand bonds (NZ2YT=RR) jumped to a more than two year high.
Even so, the kiwi is down about 4.7% since the start of this year.
"We expect interest rates to remain low for a long time and it's a global phenomenon," RBNZ Chief Economist Yuong Ha told reporters. "We'll keep watching the data and that will drive our decisions from here and we'll do what's required for that.
The RBNZ left the door ajar for further policy easing saying it was "prepared to act" if required. The central bank's own projections imply a 50/50 chance of a cut next year.
However, business sentiment remains subdued despite the policy easing. Economists expect at least one more cut to 0.75% as growth in the $200 billion economy is yet to pick up.
MARKET REACTION
Traders have complained about being wrong-footed by mixed messages from RBNZ Governor Adrian Orr in the past, but the central banker maintains he wants to reach a wider audience than just currency traders, analysts and bloggers.
Orr said the fact that analysts were again surprised by the RBNZ decision on Wednesday reflected deeper market uncertainties about the economy, and was not an attempt to catch investors off-guard.
"Market pricing and expectations have been moving around considerably... based on data coming in," said Orr.
He added that the RBNZ was seeking to be as transparent as possible.
"Today's decision shows that the RBNZ is not afraid to stare down financial markets," said Dominick Stephens, chief economist at Westpac, which changed its call twice in the days leading up to the decision. "The RBNZ is certainly open to a February cut, depending on what happens to the data."
Stephens said there were two key factors that could swing the decision.
"First, we expect the housing market will be much stronger than the RBNZ expects. However, the global financial and economic situation could worsen again before February," he noted.
Capital Economics said the bank was too optimistic about the prospects for growth in New Zealand.
"The Reserve Bank of New Zealand sounded cautious when it left rates on hold today but we believe that a deterioration in the economy will force the bank to 0.5% by early next year," Capital Economics analyst Ben Udy said in a note.
The RBNZ's dual mandate includes targeting employment, which has put the spotlight on labor figures. Data released last week showed unemployment ticked up from a decade low but was still below the bank's forecast in August.
Wednesday's rates hold echoed Australia's central bank, which kept policy unchanged at its meeting last week, having already delivered three rate cuts this year to a record low of 0.75%.