Retail banks started cutting their mortgage lending rates yesterday, after the Reserve Bank slashed its official cash rate by 0.5% to 7.5%But Reserve Bank governor Alan Bollard warned that existing borrowers would not benefit immediately from the largest cut in the OCR since 2001 although new borrowers would.
The effective mortgage rate - the average rate being paid on outstanding mortgage debt - had continued to rise since the June monetary policy statement.
That was because of the run-up in fixed-term mortgages between January 2004 and January 2008.
Borrowers who fixed their rates during that period were now facing higher rates as they rolled over.
During the past three or four years, borrowers could mitigate rising interest rate costs by searching for the fixed period with the lowest interest.
That option was no longer possible, Dr Bollard said.
Government-owned Kiwibank was again the first bank to cut its rates, dropping its floating rate 0.5% to 9.7% and its benchmark two-year rate to 8.49%.
Chief executive Sam Knowles said the reductions would be a welcome relief to new home buyers and those looking to re-fix their mortgages.
"We appear to have passed the peak of very higher interest rates and we now have the opportunity to pass on some genuine savings to home owners," he said.
Forecasting rate movements was difficult but Mr Knowles envisaged Kiwibank being able to at least hold the new rates and to look for further cuts when the opportunity arose.
Dr Bollard said the New Zealand economy was experiencing a marked slowdown, led primarily by the household sector.
"The outlook for the global economy has deteriorated further in the wake of continued financial market turmoil.
In addition, the New Zealand business sector is coming under pressure from both rising costs and falling demand."
Domestic activity was likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes but the Reserve Bank expected a prolonged period of household sector adjustment and below-average growth.
The scale and timing of further official cash rate reductions would depend on signs of declining inflation pressures and on exchange rate adjustments, he said.
ANZ-National Bank chief economist Cameron Bagrie said the front-loading of the easing cycle was a welcome response to economic factors but it was not a risk-free strategy.
He expected to see the OCR fall to 7% by the end of the year, with either a 0.5% cut in October or 0.25% cuts in both October and December.
"The election may be the wild card in term of the governor's thinking and we wouldn't entirely rule out a pause in October, particularly with confidence stabilising and the currency under pressure."
Dr Bollard was previously head of the Treasury and was far more in tune with the realities of the political process.
That should not matter and economics should hold sway.
The bigger indicated a 2% to 3% fall in rates with the wildcard remaining the global backdrop.
"The risk still looks pointed to a worsening environment. But for now, we'll continue to flag a pause in the cycle at year end, but within the spirit of a declining rate environment,"Mr Bagrie said.
Marac Finance managing direction Brian Jolliffe said the reduction in interest rate was also good news for homeowners and would put more money back in the pockets of New Zealanders.
"However, with interest rates about to fall, those who rely on fixed interest investments for income, and who have experienced a significant increase in the day-to-day price of commodities already, may have to tighten their belts further.
Now is a good time for those investors to lock in longer terms on fixed interest investments to take advantage of the high rates currently being offered."
Council of Trade Unions economist Peter Conway said although banks were arguing the offshore cost of borrowing restricted their ability to pass on a rate cut which they had already factored in, the OCR cut was higher than most expected.
"This means there will be pressure on the banks to respond."
Wages rose 3.5% in the June year, consumer prices were up 4% and Treasury said labour productivity for the March year rose by 3.1%.
That showed it was not wage pressure driving inflation.
The economy was in a shallow recession and a neutral cash rate of 6% was needed, he said.
