Other banks were likely to follow suit as banks were under pressure to lower their interest rates and free up cash for borrowers, especially small to medium-sized businesses, ABN Amro Craigs broker Peter McIntyre said yesterday.
The Reserve Bank makes its next announcement on monetary policy on January 29.
Markets were yesterday pricing in a full 1% cut with indications that another cut of at least 1% would be made by June.
That would take the OCR to 4% on January 29 and 3% by June.
"There will be a bit of gamesmanship in all of this as some banks will cut before the Reserve Bank but might not cut any more after January 29."
The Reserve Bank was likely to continue with its aggressive easing of monetary policy this year as the global economic crisis continued, he said.
The ANZ-National Bank cut its two-year rate to 7% from today, down 0.2%.
Its three, four and five-year fixed rates will drop to 7.10%, a fall of between 0.1% and 0.89%.
"I'm not sure that the level of interest rates is the major disincentive to borrowing currently. The major disincentive to borrowing is questions like am I going to have a job next week," David Tripe, director of Massey University's Centre for Banking Studies, said.
The state of the job market was seen as important in influencing sentiment about the economy, which was bleak.
Prime Minister John Key announced an employment summit to be held in Auckland next month.
Mr Tripe said funding costs were higher for longer term fixed mortgage rates but swap rates on the money market have come down.
The margin above the swap rate, at which fixed mortgage rates are set, continues to be historically high.
The five-year swap rate was around 4.65% on Monday, which was still below the new ANZ-National five-year fixed mortgage rate of 7.1%.
The five-year swap rate has fallen from 5.05% in mid-December.
During so-called mortgage wars, the difference between swap and fixed mortgage rates has been less than 100 basis points, or 1%.
Mr Tripe said the swap rates had fallen by more than banks were reducing.
Banks were facing higher funding costs in the credit crunch but how much higher was not known.
Banks had also tightened lending criteria, requiring people buying houses to have bigger deposits.
New Zealand's dollar was being affected by the lower interest rates, with its value falling in early trade before making a recovery, of sorts, later in the day.
At 8am, the New Zealand dollar was buying US54.67c, down nearly US2c from 5pm on Tuesday.
At 5pm last night, it was trading at US55.61c The dollar was also down against the Australian, British, European and Japanese currencies.
However, the dollar was affected most by the results of the New Zealand Institute of Economic Research's quarterly survey of business opinion which reported business confidence at its lowest point in nearly 40 years.
International ratings agency Standard and Poor's also cut New Zealand's external credit rating from stable to negative.
State Street Global Markets senior currency strategy Robert Blake said the news on New Zealand highlighted the global nature of the downturn and the risks to global growth.
Mr McIntyre said any further downgrade would see the cost of New Zealand's overseas debt rise and place further pressure on the currency.
"We are going into the reporting season in the United States and we will be bombarded with economic data for the next two or three months.
"From that perspective, there will be further volatility in the dollar, although we will not be seeing the big movements we had in October and November."
Households would find their consumption costs rising, he said.
Overseas, the US dollar rose to a one-month high against the euro as data showed a sharp narrowing in the United States trade deficit and investors braced for a European Central Bank interest rate cut tomorrow, New Zealand time.
Markets expect the ECB to cut its main interest rate by 0.5% to 2%.
An additional sting to the single European currency came as Spain became the third euro zone member, along with Ireland and Greece, to be warned by Standard and Poor's its sovereign credit rating was under threat.
