Reserve Bank governor Alan Bollard sent a message to the banks yesterday, loud and clear, to cut mortgage rates and soon.
Some of the banks had been warning borrowers not to expect the expected cut in the Reserve Bank's official cash rate yesterday necessarily to flow through tomortgage rates.
So Dr Bollard gave an unexpected double dose of rate cuts, dropping the OCR from 8 to 7.5 per cent.
"We would expect some of this to pass through and trigger mortgage rate reductions," he said pointedly.
The banks had argued that a series of quarter-point cuts was already factored into local wholesale interest rates. But they also have to import a large part of their funding and the continuing turmoil on international credit markets has pushed up the premium they have to pay.
Dr Bollard's half-point cut immediately pushed local wholesale interest rates lower, by 20 basis points two years out, triggering mortgage rate cuts by several banks.
He stressed that "front-loading" interest rate cuts did not mean they would end up any lower than the bank already had in mind.
The Reserve Bank is also mindful of how long it takes cuts in the official cash rate to flow through to borrowers because of the preponderance of fixed-rate loans. For the next few months borrowers rolling off two-year loans with an average interest rate of 8.5 per cent may still face a higher rate when they reset.
Meanwhile, the bank expects house prices to fall 10 per cent over the course of this year and to have fallen 15 per cent in all, from their 2007 peak, before the cycle turns up again.
In real terms that would be a fall of 24 per cent, the biggest since the 1970s, Dr Bollard told MPs on the finance and expenditure select committee. "People are poorer as a result of that."
But New Zealand did not face the sorts of problems afflicting the United States market - a large overhang of housing and a lot of lending to borrowers who were not creditworthy.
