By Ana Nicolaci da Costa and Charlotte Greenfield

By Ana Nicolaci da Costa and Charlotte Greenfield


WELLINGTON (Reuters) - The small New Zealand party holding the balance of power after inconclusive elections will announce on Thursday which party it will back in government, ending weeks of political limbo that have hurt the currency and business sentiment.


New Zealand First has said it will make an announcement on the government formation in the afternoon, nearly a month after an inconclusive election result left both National and Labour courting the nationalist party to form a governing coalition.


The decision will also shed light on the economic direction of the country given that the major parties differ on policies regarding immigration and trade - sources of New Zealand's robust economic growth in recent years.


"We've had a period of intensive negotiation and I'm satisfied that the agreement that we've reached with NZ First, would be able to form the basis of a strong and cohesive government," Prime Minister Bill English, who also heads the ruling National Party, told reporters in Wellington.


The New Zealand dollar, which has fallen around 2.5 percent against the U.S. dollar since the vote, was little changed, up 0.08 percent at $0.7160 before the announcement.

Before the election, the currency tended to strengthen when National, which has been in power for nearly a decade, rose in opinion polls and fall when Labour gained ground.

"Taking that into today's result should mean that the Kiwi will go up on National and down on Labour," Westpac analyst Imre Speizer said, referring to the local dollar.

"It's not necessarily that the market is taking a view that Labour will be economy unfriendly ... It's more that you just don't know what exactly you will get in terms of the policy that is executed."

NZ First has more in common with Labour on the policy front, as both want to rein in immigrants and foreign ownership, change certain trade deals and adjust the central bank's mandate.

But some analysts say a two-way coalition with National would be more straightforward than a three-way coalition with Labour and the Greens. Labour needs the seats of both the Greens and New Zealand First to reach a majority in parliament.

(Reporting by Ana Nicolaci da Costa and Charlotte Greenfield; Editing by Stephen Coates)