The Reserve Bank is expected to make one further and final cut to its official cash rate on Thursday at the release of its monthly policy statement.
Economists expect the central bank to still include an easing tone in its statement and, as inflation risks are still pointing downwards, no-one is completely ruling out another cut next year.
The OCR is 2% and a cut would take it to 1.75% on Thursday.
The Australian Reserve Bank is holding its cash lending rate at 1.5%. Australia has an inflation rate of 1.3% compared with 0.4% in New Zealand; revised up from 0.2% yesterday.
New Zealand inflation expectations for the next two years have increased, a Reserve Bank survey shows, in an economy respondents believe will pick up pace.
Expectations for inflation one year out rose to 1.29% compared with 1.26% in the Reserve Bank's previous survey of expectation three months ago. The two-year-ahead figure edged up to 1.68% from 1.65%, although this was little changed for a third straight quarter.
Based on the Reserve Bank's August MPS, annual inflation of 0.2% in the third quarter was a low point. The Consumers Price Index - the official measure of inflation - is seen rising to 1% on an annual basis, the bottom end of the central bank's 1% to 3% target range, in the fourth quarter.
The 90-day bank bill rate, considered a proxy for the OCR, is expected to be 2% by the end of 2016 and be little changed by September 2017. The rate was 2.13% when the survey was taken, the Reserve Bank said. Expectations for gross domestic product, or economic growth, showed a more marked change from three months ago.
ASB economist Daniel Snowden said an OCR cut on Thursday would be consistent with the central bank's outlook and recent developments. A cut was anticipated by financial markets.
``If the Reserve Bank did not follow through on its clear-cut signal, it would prompt a marked lift in the New Zealand dollar and interest rates.
``Beyond November, we expect the Reserve Bank to remain on hold.''
The risks were skewed to further action but strong economic momentum and rising dairy prices would generate greater inflation pressure over time, he said.
The New Zealand economy was displaying signs of robust momentum, aided by record high levels of migration and strong tourism. Encourag-
ingly, the recent recovery in dairy prices would eventually boost growth and inflation.
``The Reserve Bank may express a little more confidence in the dairy outlook this time round. However, there are still a number of downside risks to the outlook.''
Those included the strength of the dollar which was hampering efforts to boost inflation, inflation expectations, global uncertainty and China's growth prospects, Mr Snowden said.
A complication for the Reserve Bank was how much of the OCR cut was passed through to customer deposit and lending rates.
Recently, longer-term interest rates had started to rise from extraordinary lows, led by increases in offshore interest rates as well as higher risk premiums banks paid to obtain wholesale funding. Also, growth had been slowing in deposits, banks' main source of funding in the past few years.
Low interest rates had increasingly encouraged stronger borrowing demand but slower deposit growth. That left banks with a need to obtain an ever greater amount of alternative funding, mainly from relatively expensive wholesale funding sources.
``In that environment, banks will also be keen to hang on to their retail deposits, restraining the ability for deposit rates to follow the OCR lower.''
