The New Zealand dollar fell after a slower-than-expected pace of annual inflation stoked speculation the country's Reserve Bank will refrain from raising interest rates as quickly as it had previously indicated, with some economic commentary suggesting a bias towards a rate cut could yet emerge.

The kiwi declined to 76.59 US cents at 5pm in Wellington from 76.74 cents at 8am and 77.17 cents yesterday. The trade-weighted index dropped to 78.15 from 78.85 yesterday.

Government figures showed the consumers price index unexpectedly dropped 0.2 percent in the December quarter as plunging global oil prices led to cheaper petrol domestically. The annual pace of inflation slowed to 0.8 percent, just below the central bank's target band of between 1 percent and 3 percent, fuelling speculation governor Graeme Wheeler will delay any future rate hikes.

"CPI was below estimates and Reserve Bank forecasts, and the outlook for the next print is pretty horrible," said Imre Speizer, market strategist at Westpac Banking Corp in Auckland. "The market as a result has priced in even more possibility of an interest rate cut by the Reserve Bank."

Swap rates dropped after the inflation data, with the two-year swap rate falling to 3.65 at 5pm in Wellington from 3.72 yesterday, and the 10-year swap rate declining to 3.7675 from 3.7875. Traders are pricing in a reduction of 2 basis points to the 3.5 percent official cash rate in the coming 12 months, according to the Overnight Index Swap curve, indicating they see a chance of a cut by the Reserve Bank.

Speizer said interest rate market pricing indicates a 16 percent chance of a rate cut, and investors will be closely watching next week's OCR review.

"If they remove the tightening bias and have no directional bias at all in the policy paragraph then the kiwi will fall quite sharply on that," he said. "How far could it fall? I think it could fall to 75 US cents."

An increase in the dairy price on Fonterra Cooperative Group's GlobalDairyTrade platform did little to stoke demand for the kiwi, with a 1 percent gain across all products on reduced supply.

Traders are preparing for the European Central Bank meeting on Thursday in Brussels to see whether the region's monetary authority embarks on a major quantitative easing programme to try and inject life into Europe's ailing economy. The kiwi dropped to 66.18 euro cents from 66.63 cents yesterday.

The kiwi fell to 90.13 yen at 5pm in Wellington from 91.19 yen yesterday after the Bank of Japan maintained its stimulus package, doubling its monetary base in a bid to stoke inflation. Japan's central bank also extended provisions to stimulate bank lending for another year.

The local currency dropped to 4.7609 Chinese yuan at 5pm in Wellington from 4.7950 yuan yesterday, and declined to 93.28 Australian cents from 94.46 cents. It fell 51.20 British pence from 51.20 pence yesterday.