The New Zealand dollar fell after a survey showed inflation expectations remain anchored well below the Reserve Bank's target, making it more likely the central bank will cut interest rates again tomorrow.

The kiwi was trading at 63.33 US cents at 5:05pm in Wellington, up from 63.24 cents after the survey release but down from 63.69 at 8am. The trade-weighted index was at 69.95 points from 70.34.

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The most-watched numbers from RBNZ's survey of business managers and professionals, which was conducted between October 16 and 22 by Nielsen, showed mean two-year ahead inflation expectations fell to 1.8 per cent from 1.86 per cent in the September quarter and 2.01 per cent in the June quarter surveys.

Mean expectations for one-year ahead inflation fell to 1.66 per cent from 1.71 per cent in the September quarter and 1.97 per cent in the June quarter.


The survey also showed respondents expect the economy to continue to grow at a little above 2 per cent for the next couple of years.

The RBNZ, which is charged with keeping inflation at about 2 per cent over the medium term, has cut its official cash rate from 1.75 per cent to 1 per cent so far this year.

"RBNZ places significant emphasis on inflation expectations," says foreign exchange services company XE. "Falling expectations will be of concern to RBNZ and make it highly likely the RBNZ will reduce the OCR."

According to a Bloomberg survey conducted early this week, 15 out of 21 economists are predicting RBNZ will cut the OCR to 0.75 per cent while the other six are expecting no change.

But at least one of those six, Westpac chief economist Dominick Stephens, has changed his mind again and says the survey outcome makes it more likely RBNZ will cut the OCR.

Stephens notes the slump between the June and September quarter surveys was one reason RBNZ cited for its 50 basis-point OCR cut in August.

"Our suspicion was that the survey would rebound as the data are often volatile quarter to quarter. The fact that expectations actually fell further will be quite concerning to RBNZ, increasing the chance they will cut the OCR tomorrow," Stephens says.

He notes that the RBNZ will have received the survey's outcome well before they were released to the market, meaning the numbers will certainly be incorporated in the central bank's latest forecasts.


But not everybody thinks the survey results are sufficient to justify an OCR cut.

"The market's talked itself into a very negative position for tomorrow," says Tim Kelleher, head of foreign exchange sales at Commonwealth Bank of Australia.

"I don't think RBNZ need to do anything tomorrow but the market's obviously priced in a 65 per cent chance of a cut," Kelleher says.

"If they don't, there's going to be hell to pay. We're not far off record short positions" and the New Zealand dollar could jump 1-1.5 US cents if there's no OCR cut, he says.

But if the OCR does go to 0.75 per cent, there may not be a great deal of market reaction, Kelleher says.

The New Zealand dollar was trading at 92.55 Australian cents from 92.90 cents, at 49.25 British pence from 49.54, at 57.40 euro cents from 57.69, at 69.12 Japanese yen from 69.42, and at 4.4355 Chinese yuan from 4.4645.

The two-year swap rate edged down to a bid price of 1.0292 per cent from 1.0550 per cent yesterday while 10-year swaps eased to 1.5050 per cent from 1.5325 per cent.