Reserve Bank deputy governor Grant Spencer said, while releasing the financial stability report, there was probably scope for more competition in the floating rate segment of the mortgage market.
He maintained that margins on floating rate mortgages were unusually high.
However, Mr Alexander said the Reserve Bank's maths were off the mark.
Three weeks ago, the Reserve Bank cut its cash rate by 0.5% to 2.5%.
Normally, that would lead to a 0.5% cut in floating mortgage rates.
"They have remained unchanged. Over the past year, the official cash rate has been cut 5.75%. Floating mortgage rates have fallen 4.5%. What gives?"
The answer is the biggest global credit crisis in the lives of practically all of us shattering traditional interest rate dynamics - and the Reserve Bank should be aware of this."
In simple terms, the official cash rate was the cost to banks of borrowing money from the Reserve Bank to balance their accounts with the central bank, Mr Alexander said.
The account could get out of balance if customers wrote more cheques than the banks received.
The money borrowed was paid back to the Reserve Bank, usually in a very short time.
The Reserve Bank, outside of some special contingency funding associated with the current offshore credit crisis, did not supply the money banks lent to businesses and home buyers.
"We do not fund a 25-year mortgage by borrowing from the Reserve Bank for 25 years. We have to get that money from depositors and investors and offshore.
"The relationship between the rates of interest we pay depositors and investors offshore and the official cash rate set by the Reserve Bank has collapsed because of the global crisis."
Mr Alexander used an example of a 90-day term deposit.
Normally, the rate the BNZ offered would be well below the 90-day bank bill yield where the bill yield was tied to the official cash rate - currently at 2.5%.
But with bill yields now at 2.9%, the BNZ 90-day term deposit rate was 4.25%.
A year ago, the cash rate was 8.25% and the 90-day bank bill yield was 8.7%.
The BNZ 90-day term deposit rate was 7% and the floating mortgage rate 10.95%. The margin between the mortgage rate and the bill yield was 2.25%.
A year later, that margin had climbed to 3.6%, he said.
Not only was the bank funding some of its floating rate lending offshore with premium costs adding up to an extra 3% to the bill yield, it was also using term deposits so they needed to go into the calculation, he said.
"There is no firm basis for the Reserve Bank's claims that floating mortgage interest rates are too high. In fact, they are too low.
"The upshot of this discussion is that the Reserve Bank is not giving the full picture when it makes comments regarding the level of interest rates they would like to see.
We do not fund anyone's mortgage or business loan at the official cash rate."
Mr Alexander has written extensively about the Reserve Bank's diminished ability to heavily influence anything other than very short-term interest rates from 2004 to most of 2006.
In the midst of the current credit crisis and the structural shift in term deposit rates and offshore funding costs, the central bank had practically lost that ability as well, he said.
The comments this week were undoubtedly driven by intense frustration at the ending of firm monetary policy influence in New Zealand "for the time being" and could be forgiven.
However, the problem emerged for the tens of thousands of people who might look to the central bank to give them guidance as to what to do with their mortgage, Mr Alexander said.
The Reserve Bank emphasised it planned cutting the official cash rate further, keeping it low until late 2010 and current floating rates should come down.
They were inviting people to float but floating interest rates were unlikely to fall further.
The chances were that the Reserve Bank would lift its cash rate earlier rather than late next year and fixed borrowing costs were drifting up.
"By getting into the discussion about whether bank customers float or fix, they have stepped outside their area of expertise and muddied the waters for borrowers."
Leaving a mortgage at a floating rate had not worked for those who missed record low fixed rates two months ago.
It was also not working for those floating at 6.49% when they could fix one-year at 5.49%, he said.
It would also probably not work for those waiting for a decent dip in fixed rates before fixing.
At a glance
> Mortgages and business loans not funded at official cash rate
> Floating interest rates unlikely to fall further
> Reserve Bank might raise official cash rate earlier than expected
> Fixed borrowing costs drifting up
