(Adds comment, updates market reaction)
* RBNZ says current rate level "appropriate"
* RBNZ says inflation restrained, warns of high NZ dollar
* Risk of surprise rate cut has risen - poll
* Markets ignore; NZ dollar, debt futures a touch higher
By Mantik Kusjanto
WELLINGTON, April 26 New Zealand's central bank held its official cash rate (OCR) steady on Thursday and tried to talk down a strong local dollar with a hint of a possible rate cut, but markets took the warning in stride.
The Reserve Bank of New Zealand (RBNZ) left the benchmark rate at 2.5 percent, where it has been since March last year, pointing to benign inflation and a high local dollar.
"For now, it's appropriate for the OCR to remain at 2.5 percent," RBNZ Governor Alan Bollard said in a brief statement.
But he said the New Zealand dollar was still high despite recent falls in commodity prices, and warned that would influence future policy without explicitly threatening the central bank would cut rates.
"Should the exchange rate remain strong without anything else changing, the bank would need to reassess the outlook for monetary policy settings."
The kiwi dollar shrugged off the warning, rising as the statement was not seen as dovish as many investors had expected, given tame inflation at home and a patchy economic outlook.
"Markets were clearly unimpressed by the threat," said RBC strategist Michael Turner.
The kiwi dollar hit a high of $0.8178 from $0.8130, before fading to $0.8145, and swap yields fell, with the two-year yield down 7 basis points to 2.725 percent, the lowest since Jan. 31.
This reinforced expectations the cash rate will be held at current levels for longer, even as business and consumer confidence picked up from low levels, and home prices recovered.
"The RBNZ has considerable scope to stay on the sidelines," said ANZ-National chief economist Cameron Bagrie. "OCR hikes clearly remain such a long way off there seems little point even putting a date on it."
The consumer price index rose 0.5 percent in the March quarter, bringing annual inflation down to 1.6 percent from 1.8 percent in the December period.
The RBNZ, backed by various price surveys, has been relaxed on the price front, expecting annual inflation to remain within the target band of 1 percent to 3 percent well into next year.
Helping keep a lid on domestic prices is the strong New Zealand dollar, which has risen 5 percent this year against a basket of currencies, but which is also weighing on the country's exports and earnings.
New Zealand's economic growth slowed to seasonally adjusted 0.3 percent in the December quarter from 0.7 percent in the September quarter.
A Reuters poll of 14 analysts after the RBNZ statement showed respondents unanimously seeing no change to rates in the June 14 monetary policy statement, but the chances of a possible rate cut are put at 10 percent.
Financial market pricing was even more dovish, implying a 20 percent chance of a 25 basis point cut in June and 7 basis points of rate cuts over the next 12 months, from small rises earlier.
Bollard said the domestic economy was showing signs of recovery, with housing market activity picking up and a recovery in building activity under way, as expected.
"That recovery will strengthen as repairs and reconstruction in Canterbury pick up later this year," he said.
The RBNZ's rate outlook lies between the Bank of Canada's comment last week that it may need to start raising rates on the prospect of higher growth and inflation, and neighbouring Australia, where the central bank is expected to cut rates next week for the first time since December on soft inflation. (Editing by Jacqueline Wong)