The Reserve Bank caught some parts of the financial markets by surprise yesterday by shaving 0.25% off its official cash rate, taking it down to 8%.
Within minutes of the announcement, the NZ dollar fell 1c against the United States currency and the NZX-50 opened 25 points up.
The rate was last at 8% a year ago and the last time the central bank cut the cash rate was on July 24, 2003 when it went from 5.25% to 5%.
"I expect the 0.25% cut to make damn-all difference. It's just a feel-good factor and the start of people lifting out of the doom and gloom," Mr Smith, of Peter Smith Financial Services, said.
The cut would make little difference to mortgage rates because a slight fall had already been built into three-year fixed lending rates and the bond market had factored in an easing in monetary policy.
The floating rate would be unlikely to move before Christmas, and then only if Reserve Bank governor Alan Bollard cut the OCR again in September or October.
Main retail floating rate mortgages were yesterday being quoted at 10.95%.
The rate could be down 1% in 18 months, he said.
The Australian-owned banks in New Zealand were raising money through bond issues, which was likely to keep the fixed rates close to where they were now, Mr Smith said.
ASB Bank cut its two-year rate by 0.25% to 8.95% and kept its floating rate at 10.75%.
Kiwibank, which has led other markets down with interest rate cuts this year, said it would not immediately cut rates again following the Reserve Bank move.
Kiwibank spokesman Bruce Thompson said the bank had anticipated the Reserve Bank move with its earlier cuts.
Dr Bollard has indicated there would be further cash rate reductions.
Kiwibank has the advantage that it funds only on the domestic market and with many finance companies failing, investors have headed to the relative safety of the Government-owned bank.
On July 3, Kiwibank cut its key three-year rate to 8.79%, citing strong growth in deposits to fund lending.
Finance Minister Michael Cullen said yesterday's cut was good news for mortgage holders, even if it did not mean an immediate fall in rates.
If the OCR had not been cut, there might have been an increase in mortgage rates, because of international factors.
Dr Bollard said recent oil and food price increases meant annual inflation should peak around 5% in the September quarter.
"However, we expect inflation will return inside the target band [1%-3%] in the medium-term.
The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed."
Bank of New Zealand research economist Stephen Toplis said the Reserve Bank caught him by surprise, not for the cut in the OCR, but for the signal to interest markets to rally strongly.
"We had thought the bank might be wary of this. Apparently, it is not."
The BNZ was forecasting the cash rate to be at 7.25% by the end of the year, continuing to fall to a trough of 5.5% by the end of 2009.
