ASB senior economist Jane Turner said the Reserve Bank's last 25 basis point OCR cut in March was not immediately passed on in full to borrowers by all banks, due to an increase in risk premium for offshore funding.
"In the wake of Brexit and ongoing uncertainty, particularly around the health of the European banking sector, offshore bank risk premia are likely to remain elevated,'' Mrs Turner said when contacted for comment.
In separate announcements last week the Reserve Bank toughened its policy on loan to value restrictions (LVR), requiring all housing investors across the country to now have a 40% deposit, then later highlighted the strong New Zealand dollar was impeding its efforts to get inflation to the middle of its 1%-3% target.
The twin announcements have economists predicting a high likelihood the record low 2.25% OCR will be cut to 2% in August, and potentially to 1.75% in November, in an attempt to get inflation up from the stubbornly low 0.4%.
Mrs Turner said whether further cuts were to be passed on depended on the timing of further OCR cuts and how funding costs evolve.
"The Reserve Bank has previously signalled that it would be willing to cut the OCR even further to offset the impact of funding costs, if it felt borrowing rates were not sufficiently stimulatory,'' she said.
The OCR remained influential on short and medium-term borrowing rates, but Mrs Turner said it was only one of many influences and the Reserve bank "remains wary'' of its limitations.
"Fortunately for New Zealand, the Reserve Bank has room to cut the OCR lower if need be,'' she said.
She noted the Reserve Bank has not had to venture into more "experimental'' forms of monetary stimulus, such as have been seen in the US, UK and Europe.
When asked why New Zealand's interest rates had not fallen as far as they had in the rest of the world, Mrs Turner said one reason was that the economy was continuing to perform relatively well.
"The New Zealand economy has been supported by relatively sound fiscal management, strong population growth, growth in tourism and construction,'' she said.
The market's pricing of future rate cuts influences movements in 1 and 2-year swap rates, between banks, she said.
Both of those rates had moved lower during the past week to reflect the fact the market now believed the OCR could fall below 1.75% by mid-2017, Mrs Turner said.
The swap rates, plus credit premium, form the basis for costing lending rates.
Swap rates typically fall before declines in the OCR if the market is confident the Reserve Bank will deliver these OCR cuts, she said.
"This means that borrowers may not necessarily need to wait for the OCR to be cut to ‘lock in' and benefit these lower rates.
"This also explains why some fixed rates do not move when the OCR is cut, because the rate already reflected this expected path for the OCR,'' Mrs Turner said.
On the question of the tougher LVR requirements, Mrs Turner said the Reserve Bank had been "relatively cautious'' in implementing the restrictions, being a "fairly new tool'' and the impact of the new lending restrictions was unknown.
While the introduction could have a temporary dampening impact on house price growth, the Reserve Bank's primary goal was to limit borrowers' exposures and vulnerability from buying into an "overvalued'' housing market, she said.
