Key Points:

Banks have begun to drop home loan rates after the Reserve Bank this morning cut the official cash rate by 150 basis points to 3.5 per cent.

The ANZ-National Bank Group, Westpac and Kiwibank have now cut their mortgage rates.

Kiwibank's lowest rate is now its one-year fixed-term, which is down 0.3 per cent to 5.69 per cent. Its two-year has dropped one per cent to 5.99 per cent and the floating rate is down 0.5 per cent to 6.49 per cent.

Westpac has also cut, saying its floating rate would reduce from 7.49 per cent to 6.89 per cent and its one year rate from 6.8 per cent to 5.79 per cent.

The ANZ National Group has now joined in, cutting its floating rate from 7.5 per cent to 6.95. Other rates changes include the National Bank's 2-year fixed falling 1.05 per cent to 5.95 per cent. The ANZ's 2 year rate has fallen from 7 per cent to 6.25 per cent.

Commercial banks were urged to quickly pass on lower interest rates, after the Reserve Bank this morning cut rates by 1.5 percentage points.

This cut takes the OCR down to 3.5 per cent, the lowest since the rate was first introduced a decade ago.

Chief executive of the Canterbury Manufacturers' Association John Walley, said the Reserve Bank should force the commercial banks to pass the lower interest rates on, especially since taxpayers were now underwriting bank deposits.

"Can I please have taxpayer guarantees for my business? The Reserve Bank needs to flex its regulatory muscles and start shaking the cage in that regards," said Walley.

If the banks did pass on the lower interest rate, the cost of borrowing would drop and combined with the falling New Zealand dollar, margins would improve for exporters.

"If anything is going to get us out of this mess, it's that part of the economy, having beaten it to death for the last five years," Walley said.

He said if the OCR had not been cut, then jobs in manufacturing would have been threatened.

"While the threat level falls, whether it saves jobs has more to do with the rest of the economy then it has got to do with the OCR. It's helpful but of itself it is not enough," Walley said.

While Bollard told financial institutions he expects them to lower their lending rates, although he did not state what the rates should be.

"This isn't Muldoon days. The Government doesn't tell the banks what the interest rate ought to be. It's a comment about the direction and behaviour rather than a comment about levels. We do not tell the banks what rates they should be setting."

The money markets had been regarding a cut this morning from 5 to 4 per cent as a near certainty and saw about a 50:50 chance that governor Alan Bollard would drop the rate to 3.5 per cent.

Since last July the Reserve Bank has lowered the OCR by a cumulative 475 basis points, dispensing ever-larger cuts as the flow of economic data, foreign and domestic, has worsened markedly.

ASB economist Nick Tuffley said he now expected another 100 basis point cut in the Official Cash Rate in March, with the rate falling to as low as 2 per cent.

In a press statement accompanying the announcement, Bollard said: "The news coming from our trading partners is very negative. The global economy is now in recession and the outlook for international growth has been marked down considerably since our December Monetary Policy Statement.

"Globally, there has been considerable policy stimulus put in place and we expect this to help bring about a recovery in growth over time. However, there remains huge uncertainty about the timing and strength of a recovery.

"The extent of the decline in global growth prospects and the ongoing uncertainty has played a large part in today's decision. We now expect the impact on New Zealand of these developments to be greater than we did in December, as a result of a more negative outlook for the terms of trade and exports, and tighter credit conditions."

Inflation pressures were abating, said Bollard. He said the bank had confidence that annual inflation would "be comfortably inside the target band of 1 to 3 per cent over the medium term".

"Given this backdrop it is appropriate to take the OCR to a more stimulatory position and to deliver this reduction quickly," he said.

"Today's decision brings the cumulative reduction in the OCR since July 2008 to 4.75 percentage points. Lower interest rates will have a positive impact on growth, alongside a lower exchange rate and fiscal stimulus, provided firms and households do not unnecessarily contract their spending."

Bollard again made the point that the bank expected financial institutions to play their part in the "economic adjustment process" by passing on lower wholesale interest rates to their customers.

"This will help New Zealand respond flexibly," said Bollard.

"Further movements in the OCR will be assessed against emerging developments in the global and domestic economies and the response to policy changes already in place. We would expect any further reductions to be smaller than those seen recently."

Combined Trade Unions economist Peter Conway said he expected the 1.5 percent cut but was concerned about Bollard's comments that there would not be another major drop.

"There is a real limit on what monetary policy can do but he should exhaust those limits," Conway said.

He said the Reserve Bank had to drop by 1.5 percentage points today and it still had enough room for further large cuts.

``The situation is that the economy needs significant stimulus,' said Conway.

ANZ National Bank chief economist Cameron Bagrie told National Radio the central bank had had to "act aggressively and throw a bit of a lifeline ... exceptional times call for exceptional measures".

Since the December review, when Bollard also cut by 150 basis points, economists' forecasts of growth among New Zealand's trading partners have been slashed, to the point where they are now expected to contract this year. Hopes for an export-led recovery are accordingly dashed.

-EDWARD GAY/HERALD ONLINE

Interest Rate Cut Reaction
Alan Bollard's announcement

History of the OCR