The New Zealand dollar rose almost 1% on Wednesday to its highest level in two months as the central bank lifted its forecasts for peak interest rates and pushed back when it expects cuts, in a hawkish surprise that also sent the kiwi flying on its Aussie counterpart.

Local yields also climbed as investors scaled back bets of any easing, although their timeframe is more optimistic than the Reserve Bank of New Zealand's own forecast of a first rate cut in late 2025.

The kiwi dollar jumped 0.9% to $0.6147, the strongest level since early March. It also broke a major resistance level at $0.6140.

The RBNZ held the cash rate at 5.5% as widely expected, but revised up the forecast track for the official cash rate as inflation stays stubbornly high. It now sees rates peaking at 5.7% at the end of 2024, compared with 5.6% three months ago.

"The Bank did revise up its OCR track forecast somewhat in the May MPS. However, those upward revisions partly reflected the fact that the RBNZ had revised up its estimate of the long-run nominal neutral OCR," said Abhijit Surya, Australia and New Zealand economist at Capital Economics.

"We still think there's a strong case for it to loosen policy by year-end."

Two-year swap rates jumped 11 basis points to 5.0%, and investors reduced their expectations for an October rate cut, with an implied probability of 60% from 76% before the decision.

The RBNZ news also sent the kiwi flying against the Australian dollar, which fell 0.7% to NZ$1.086, its lowest level in a month. The decline marked a reversal of the pair's recent trend as traders bet on the diverging interest rate outlook between the central banks of Australia and New Zealand.

Against the greenback, the Australian dollar gained 0.2% to $0.6677 after holding mostly steady overnight. It has struggled to reclaim the four-month top of $0.6714 hit last week.

The Australian dollar has been steadily rising against the Japanese yen though, thanks to demand to use the low-yielding yen to fund investments in higher-yielding currencies. It was last up 0.3% to 104.3 yen, a touch below an 11-year high of 104.88 yen. (Reporting by Stella Qiu: Editing by Neil Fullick)