Three banks have now moved to cut mortgage rates, after Reserve Bank Governor Alan Bollard this morning surprised the market with an aggressive 0.5 per cent cut in the official cash rate.
State-owned Kiwibank moved first, cutting all its home lending rates. Westpac has now joined in, reducing its variable mortgage rate by 0.5 per cent to 10.45 per cent. ASB Bank has just joined them, cutting its floating rate to 10.25 per cent.
Kiwbank's variable rate moves to 9.7 per cent and it has cut 0.36 per cent off its two-year fixed rate, which moves to 8.49 per cent.
"We appear to have passed the peak of very high interest rates and we now have the opportunity to pass on some genuine savings to home owners," Kiwibank chief executive Sam Knowles said.
He said Kiwibank had taken "a very aggressive position" with its 8.49 per cent per annum two-year fixed rate, while it has moved its three-year rate to 8.39 per cent.
Those rates apply for those with 20 per cent or more equity in their property.
Westpac is not cutting its fixed mortgage rates and said "there will be other changes to various deposit rates".
The cut to its variable rate will be implemented Monday for new customers and following a rate change notification process for existing customers.
ASB Bank has also dropped its fixed home lending rates, the 12 month rate now sitting at 8.95 per cent and the 2 year rate at 8.90 per cent. Other home lending interest rate changes are:
Its 6 month rate is now 9.50 per cent, three years is 8.90 per cent and its four and five year terms are 8.95 per cent.
These new home lending rates take place immediately for new borrowers, and the floating rate change is effective as from 6 October 2008 for existing borrowers.
"We are waiting for wholesale market rates to settle, and our home lending rates will continue to be under review," says Hugh Burrett, Managing Director, ASB.
"ASB sees today's move by the Governor of the Reserve Bank as a very positive initiative for the housing market and the economy in general. This bold action is just what is needed at this time."
The Official Cash Rate now stands at 7.50 per cent. Most economists and market commentators were expecting a more measured approach from the bank this morning, with a cut to 7.75 per cent widely anticipated.
When Bollard cut the OCR to 8 per cent in July, he foreshadowed further cuts, provided the inflation outlook continued to improve and there was no "excessive" drop in the exchange rate.
The New Zealand dollar dropped sharply after this morning's announcement by half a US cent to US65.67.
"The weakness in economic activity is expected to translate into lower inflation pressures in the medium term," Bollard said today.
However, food price inflation, exchange rate depreciation and higher wage costs will tend to keep headline inflation at elevated levels through 2009."
With medium term inflation pressures expected to ease, it was appropriate to move towards a less restrictive monetary policy stance, he said.
The Engineering, Printing and Manufacturing Union welcomed the Reserve Bank's move, saying it was a step towards easing pressure on exporting manufacturers.
EPMU national secretary Andrew Little said the reduction would mean a lower New Zealand dollar and so a better environment for exporting.
"We've seen a whole series of redundancies in manufacturing over the last few years and in most cases employers have cited the high dollar as a factor in their decision to downsize or close," he said.
"The simple fact is that high interest rates mean a high dollar and that often means our export manufacturing being priced out of the global market.
"Over the last five years we have seen manufacturers punished by OCR increases that were responding to pressures in completely different sectors such as housing and debt.
The rate had been too high for too long, because the "single lever monetarist model" was a "dreadful way to regulate inflation," said Little.
Along with the surprisingly big cut in the OCR, the Reserve Bank has today published its quarterly Monetary Policy Statement.
Compared to its Monetary Policy Statement (MPS) published in June, the Reserve Bank has brought forward some of the projected interest rate reduction, but has not changed the expected overall decline.
"We believe this response is warranted in light of the tightness of current credit conditions and the time it will take to affect the actual interest rates faced by households and businesses," said Bollard.
The scale and timing of future OCR reductions would depend on signs of declining inflation pressures and on exchange rate adjustments.
Bollard said that while the household sector was mainly leading the marked slowdown in the New Zealand economy, the business sector was coming under pressure from both rising costs and falling demand.
"While domestic activity is likely to pick up late this year as a result of personal tax cuts, increased government spending and rising rural incomes, we expect a prolonged period of household sector adjustment and below average growth."
In today's MPS, the Reserve Bank said activity in the New Zealand economy was likely to have contracted in each of the first three quarters of 2008, and was expected to fall by a total of 0.8 per cent over that nine month period.
The Reserve Bank projected annual average Gross Domestic Product (GDP) growth to trough at 0.3 per cent early in 2009 - the weakest since the recession of the late 1990s - then rise to 2.9 per cent by 2011. That trough is deeper than had been expected in the June MPS, while the pick-up in growth is stronger.
An extended period of weak activity this year and in 2009 was expected to result in a sizeable build-up of excess capacity, making it hard for firms, particularly retailers, to pass on increased costs to their customers, the September MPS said.
That had already been reflected in lower housing-related inflation.
The main question now facing the Reserve Bank was how far and how fast monetary conditions should be eased.
"If monetary conditions remain too tight for too long, there is a risk that the New Zealand economy enters a prolonged downturn unnecessarily," the MPS said.
Despite housing turnover stabilising during the past few months, it remained at levels consistent with falling house prices.
From their peak in 2007, nominal house prices were projected to fall by about 15 per cent, or 24 per cent in real terms, slightly more than projected in the June MPS, with negative annual growth rates persisting until 2011.
The impact of lower domestic wholesale interest rates on mortgage rates, following the 25-basis point cut to the OCR in July, had been muted by higher funding costs for banks in offshore markets, the MPS said.
Many existing borrowers would not benefit immediately from the lower OCR, although new borrowers would. The effective mortgage rate - the average rate being paid on outstanding mortgage debt - was projected to peak in the coming months and then begin gradually easing.
But considerable uncertainty surrounded the outlook for the effective mortgage rate, particularly given uncertainty around the outlook for bank funding costs.