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A senior economist believes even further cuts to the Official Cash Rate are likely.
The Reserve Bank lowered the OCR by 150 basis points to 3.5% on Thursday, with Reserve Bank Governor Allan Bollard saying the central bank expects financial institutions to play their part by passing on lower wholesale interest rates to their customers.
The cut puts the OCR at its lowest rate since it was introduced in 1999 and the Reserve Bank says they expect further reductions to be smaller than those seen recently.
Robin Clements of UBS Investment bank agrees that's likely. He says one of the downsides to Thursday's announcement is that the New Zealand dollar has fallen one percent.
He says the cut was bigger than many analysts had expected and the markets are reacting strongly as they expect further cuts.
Kiwibank and Westpac have already slashed their home loan rates following the drop in the OCR.
Banks had already started dropping their mortgage interest rates leading up to Thursday's announcement: TSB dropped its one-year fixed rate to 5.98% earlier this week after BNZ and Kiwibank dropped their fixed rates to 5.99%.
Following Bollard's announcement, Kiwibank's lowest rate for its one-year fixed-term is now 5.69%, down 0.3%, while the two-year rate is down 1% to 5.99%.
The floating rate is down 0.5% to 6.49%.
Westpac has also cut its floating rate from 7.49% to 6.89%. Its one-year rate is down to 5.79% from 6.8% and two-year to 5.89% from 6.85%.
Other banks are expected to follow suit.
Observers had been hoping the OCR cut would see a reduction in mortgage rates.
However, ASB chief economist Nick Tuffley says long term fixed interest rates are not likely to come down quickly for borrowers.
"One encouraging thing is the government has moved to reduce the guarantee costs of wholesale funding, so if banks do want to use that wholesale guarantee mechanism they've actually made that a bit cheaper, so that might help," says Tuffley.
Tuffley says short term rates will be the most attractive for prospective buyers.
The head of Auckland's Newmarket Business Association Cameron Brewer also says the latest interest rate cuts would take time to have an impact, simply because about 85% of New Zealand mortgages were fixed rate mortgages.
"The overwhelming majority of householders won't benefit until they get the first chance to renew their mortgages which could be months if not years away," he says.
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