Key Points:

Following last week's half a percentage point cut to official interest rates, the ANZ bank is advising mortgage borrowers to keep their borrowing at relatively short terms.

The bank expects the Official Cash Rate (OCR) to be down to 6.5 per cent by the end of the year, from 7.5 per cent now.

"We continue to recommend targeting a rate of one year or less," ANZ said today.

"The big picture for interest rates is that they are moving lower."

Announcing the unexpectedly large OCR cut last Thursday, Reserve Bank Governor Alan Bollard said it was warranted in light of the tightness of credit conditions and the time it would take to affect actual interest rates faced by households and businesses.
In its monthly Property Focus publication, published today, ANZ said interest rate easing cycles were typically relatively large, such as 2 to 3 percentage points.

So the broader view remained tilted towards keeping borrowing relatively short in duration.

"While this certainly carries a cashflow cost in the near-term, you stand to benefit from the associated pick-up and benefit as interest rates progressively fall," ANZ said.

It now expected the Reserve Bank to cut interest rates by half a percentage point in October and December, taking the OCR to 6.5 per cent, with further cuts beyond that.

The Reserve Bank was in effect cutting rates to offset higher international funding costs.

ANZ said it did expect to see one and two-year fixed rates fall in the coming months as the Reserve Bank cut more aggressively, but it expected the pass-through to be "muted" by what was happening around the globe.

"New Zealand is being impacted seriously by offshore events," ANZ said.

"As a nation, New Zealand runs a current account deficit, and this means we need to access global capital to fund our savings shortfall.

"While largely a US financial problem, the cost of credit has gone up everywhere."

It had been a tumultuous week across markets, ANZ said.

"We've seen Lehman Brothers file for bankruptcy, Merrill Lynch taken over by Bank of America, and a Federal Reserve sponsored bailout of the world's largest insurer.

"It seems we are now coming to a crescendo. The flow-on effects cannot be understated. Central banks and policymakers are working hard to stabilise markets, but risk appetites are very fragile, and volatility is high."

- NZPA