The Reserve Bank's funding for lending programme (FLP), which starts next Monday, could drag retail interest rates even lower before Christmas.
The programme will involve commercial banks being able to borrow at the official cash rate (OCR) - currently at 0.25 per cent - for a period of three years.
The borrowing rate will adjust over the term of the transaction with any changes to the OCR.
As it stands, banks are sourcing funds from five-year wholesale debt, which trades at 0.8 per cent, and six-month term deposits, also at around 0.8 per cent.
Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said the scheme could bring mortgage rates down before the year's end.
"The bottom line is that the excuses for banks to not be lowering those retail rates, once this facility is in existence, will fall away," Pepper said.
"It is another step towards what the Reserve Bank ultimately wants, which is lower retail interest rates," he said.
"So the prospect of that happening now - even before Christmas - is higher."
The Reserve Bank today outlined the details of the programme - expanding on the information already provided in the November monetary policy statement.
The central bank said that eligible counterparties - banks - can borrow up to an amount of 6 per cent of their total outstanding loans to businesses and households, made up of an initial allocation of 4 per cent and an additional incentive-based allocation of 2 per cent based on new lending.
The programme will require approved eligible collateral to be pledged in a similar manner to the Reserve Bank's open market operation (OMO) and term lending facility.
The Reserve Bank will make the funding for lending programme available for banks to use on a daily basis, for a period of 18 months for banks' initial allocations and a further six months for banks' additional incentive-based allocations.
The banks will be able to access the programme between 9am and noon every banking day.
The programme starts from December 7 and runs until June 6, 2022, for the initial allocations, and until December 2022 for additional allocations, the bank said.
In last month's monetary policy statement, the Reserve Bank's monetary policy committee said the effectiveness of a funding for lending programme would depend on financial institutions passing on declines in their funding costs to borrowers.
"Members agreed with the staff assessment that an FLP would be an effective way to provide additional monetary stimulus, and that it was the best tool to deploy at this time given the committee's principles for alternative monetary policy instruments," it said.