Wholesale interest rate markets have responded dramatically to the clear signal from the Reserve Bank that any cut in the official cash rate (OCR) is off the table and the next move will be up, and sooner rather than later.
The central bank on Thursday held the benchmark mark interest rate at its record low of 2.5%.
The New Zealand dollar jumped to its highest level against its Australian counterpart in almost five years, rising to as much as 87.34 Australian cents. The kiwi rose further on Friday morning, and at 7am was at a fresh high of 87.6 Australian cents.
Shorter-term interest rates rose about 11 basis points, while 10-year rates jumped 13 points after the Reserve Bank signalled interest rates were likely to rise in the new year.
Bancorp Treasury Services senior client advisor Peter Cavanaugh said it had now ruled out any chance of a rate cut and put a timetable on when the OCR will rise.
"The Reserve Bank statement is consistent with what it said before. The only difference is that the Reserve Bank has made it abundantly clear that their next OCR rise will be next year, and there will not be an OCR cut," Mr Cavanaugh said.
Westpac chief economist Dominick Stephens said the Reserve Bank had materially changed its stance.
"Since December 2011 the Reserve Bank has held a firmly 'on hold' bias for the OCR. They've explicitly shifted to the idea that the OCR will be going up," he said.
"The key sentence was that 'the removal of monetary stimulus will likely be needed in the future'. That's code for OCR hikes from a low level but they have ruled out hiking this year."
Mr Stephens expected the OCR to increase early next year.