By Mantik Kusjanto
* RBNZ says will keep rates low until recovery picks up
* Rates rises to be less than projected in September
* NZ dollar temporarily dives half a cent, debt futures rise
WELLINGTON, Dec 9 (Reuters) - New Zealand's central bank held interest rates steady and scaled back its rate and growth outlook on Thursday, backing views that it will keep rates unchanged until mid-2011 at the earliest as it tries to revive a tepid economy.
The Reserve Bank of New Zealand (RBNZ) kept the official cash rate (OCR) at 3 percent, as financial markets had expected, saying the pace of economic growth has slowed as household and businesses remained cautious about spending, and as the global outlook faced downside risks.
"While interest rates are likely to increase modestly over the next two years, for now it seems prudent to keep the OCR low until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing," Governor Alan Bollard said in a statement.
He said rates are likely to rise less over the next two years than signalled in the September statement, when its bank bill interest rates had implied the cash rate hitting around 5 percent by 2012/13.
The bank cut its forecast for 90-day bank bill futures , a barometer for the official cash rate, by about 25 basis points across the curve.
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To read the text of the RBNZ statement, see [ID:nEAP300700]
To read the instant views, see [ID:nSGE6B700E]
For Reuters poll
For a chronology on OCR [ID:nSGE6B70EI]
For a graphic on OCR, bank bill and inflation:
http://link.reuters.com/mub39q
The RBNZ held its cash rate steady at the September and October reviews after 25 basis point rises in June and July.
The New Zealand dollar fell around half a cent to $0.7448 before bouncing back to $0.7485/90 while interest rate futures prices <0#NBB:> rose by up to 10 points as investors trimmed expectations of future tightening and abandoned expectations of a hike in March.
The swap yield curve also steepened, with two-year swaps falling 5.5 basis points to 3.81 percent and the 5-year swaps down one basis point to 4.715 percent.
The restrained RBNZ outlook contrasted with the Reserve Bank of Australia (RBA), which still has a gradual tightening bias after holding rates at 4.75 percent this week. That sent the kiwi to a low of NZ$1.3132 before steadying around NZ$1.3101.
"It appears that it will take a decent pick-up in the New Zealand data flow to bring rate hikes back onto the policy table," said Deutsche Bank chief economist Darren Gibbs.
"An upward move in the OCR before the middle of 2011 is very unlikely and there must be a reasonable chance it is even later than mid-year," he added.
OUTLOOK
Economists said there was no need for the RBNZ to start hiking early next year because of the weak economic outlook and benign inflation.
A Reuters poll after the decision showed 11 of 13 analysts now expecting the first rise in June or later, with two picking March. Previously a clear majority favoured the earlier start.
The cash rate is also seen rising less, touching 3.75 percent by the end of September next year compared with 4 percent in previous polls.
Financial markets hardened their expectations for a June hike, while markets pricing of tightening for the next 12 months fell to 62 basis points from 70 basis points before the latest statement. It has fluctuated between 57 and 95 basis points since November.
Economic data since the October review has been patchy, with retail sales soft, unemployment high, and the housing market stalling. Business sentiment, however, picked up for the second time last month, and consumer confidence has steadied.
The economy is expected to have grown a meagre 0.3 percent in the September quarter, according the median forecast in a preliminary Reuters poll. It expanded 0.2 percent in the second quarter.
The RBNZ said inflation was not an issue at present, even with a temporary spike caused by an increase in the sales tax rate, which will boost the headline rate to nearly 5 percent by the middle of next year.
"There is little evidence of this spike affecting price and wage setting behaviour," Bollard said.
He also said that New Zealand's commodity prices remained high, helped by strong growth in the Asia-Pacific region.
"While this is encouraging, downside risks to global growth and export prices persist," Bollard added.
He said greater efforts to curb the government's fiscal deficit would also help ease the pressure on the current account interest rates and the currency.
The next RBNZ cash rate review will be on Jan 27. (Editing by Kim Coghill) (Created by Mantik Kusjanto)