By Stella Qiu

WELLINGTON, Feb 18 (Reuters) - New Zealand's central bank kept interest rates steady on Wednesday and tempered market expectations for a hawkish pivot, stressing that monetary settings needed to stay easy to support a fragile economic recovery.

Wrapping up its first meeting chaired by Governor Anna Breman, the Reserve Bank of New Zealand kept its benchmark official cash rate unchanged at 2.25%, as expected.

While it brought its forecast for its first rate hike to around year-end from mid-2027 in its November forecast, that was still more dovish than earlier market pricing for a first rate hike around September or October.

As a result, the kiwi dipped 0.5% to 60 U.S. cents and the two-year swap rates fell 8 basis points to 2.9245%, the lowest since mid-January.

"If the economy evolves as expected, monetary policy is likely to remain accommodative for some time," said the RBNZ, adding that it sees inflation, which popped up to 3.1% last quarter, coming back to the 1%-3% target band this quarter.

"As the recovery strengthens and inflation falls sustainably towards the target midpoint, monetary policy settings will gradually normalise."

The closely watched official cash rate (OCR) track now shows the RBNZ is forecasting the cash rate will be 2.38% by the end of the year, implying some possibility of a rate hike, acknowledged Governor Breman at her post-decision press conference.

"But we are not planning on hiking the OCR until we see more inflationary pressures and a stronger economy," she said, adding that many households still did not feel that the economy was in the early stages of a recovery.

Swaps now imply a 40% chance for a rate hike in September, down from almost 70% before the decision. A move is not fully priced in until December, compared with October before.

"The tone of the policy assessment was tilted on the dovish side, containing few red flags that suggest an imminent need for the RBNZ to raise the OCR," said Mark Smith, a senior economist at ASB Bank.

"The RBNZ appear content to bide their time." ASB still expects a full 25 basis point hike in December and gradual hikes until rates peak at 3.25% towards the end of 2027.

STILL WEAK DATA

A global front-runner in withdrawing pandemic-era monetary stimulus, the RBNZ aggressively lifted rates by 525 basis points between October 2021 and September 2023 to curb inflation. It has since cut rates by 325 bps to lift the economy out of a recession.

The economy returned to growth in the third quarter but only after a long period of outright decline. Employers added to their headcount for the first time in over a year but the jobless rate hit a decade high of 5.4% and New Zealand saw another big year of losing its citizens mainly to its bigger neighbour Australia.

The housing market remained soft in January, with prices unable to extend the small lift seen at the end of last year. Property markets in main cities like Auckland and Wellington are still down over 20% from their peaks around late 2021.

"Neither the housing market nor the labour market is looking like they will turn inflationary any time soon," said Sharon Zollner, chief economist at ANZ, who is also tipping a hike in December.

"Stepping back to observe how things pan out is sensible...we expect that ultimately the RBNZ will normalise policy more quickly than they are currently forecasting."

Breman also announced at the press conference that the RBNZ will move on to eight meetings a year from 2027, up from the current seven, amid criticism that their almost three-month summer break is too long.

(Reporting by Stella Qiu; Editing by Sam Holmes)