Kiwibank is predicting the Official Cash Rate could fall even further than the record low it reached on Thursday.
The Reserve Bank of New Zealand cut the benchmark interest rate by 1.5 percentage points to 3.5% - the lowest it has ever been.
Reserve Bank Governor Alan Bollard says move is a response to the worsening global recession and warned that retail banks must help promote economic growth by passing the lower interest costs to customers.
Kiwibank was the first to drop its fixed and floating mortgage rates on Thursday morning. Its lowest offer is now a one-year fixed term, after the interest charges fell from 5.99% to 5.69%.
Chief executive Sam Knowles says the benchmark rate could fall further, prompting mortgage rates to drop below 5% by the end of the year.
ANZ-National, Westpac and BNZ also reduced their fixed and floating home loan rates on Thursday.
South Island-based SBS Bank dropped its floating mortgage rate from 7.20% to 6.45%.
Dr Bollard says lower rates will promote economic growth, as long as businesses and households do not unnecessarily reduce their spending. He says retail banks must help to ensure that happens.
Tough year ahead - English
Finance Minister Bill English says the cut in the Official Cash Rate should help New Zealand get through the sharp edge of a recession, but believes 2009 will be a tough year.
Mr English told Checkpoint on Thursday the drop in mortgage interest rates by the banks will work alongside the fiscal stimulus coming from tax cuts and lower fuel prices.
However, he says banks should also extend the cuts to business interest rates.
"Businesses are seeing their revenues drop off - that business confidence is a concern when it flows through into job losses, and those do appear to be growing.
"And anything banks can do to pass through the reductions, as they should, are going to help those businesses and help people keep their jobs."
Since July 2008, the Reserve Bank has lowered the benchmark rate from 8.25%. The latest rate compares with 4.25% in Australia, 0.1% in Japan, 1.5% in Britain, 2% in the eurozone and 0% to 0.25% in the United States.
New Zealand is officially in a recession, which began nine months ago. Inflation is 3.4%.
The trade deficit widened to $5.6 billion in the year to December, according to latest figures.
Exports surged 17% to nearly $43 billion, led by dairy products, crude oil and meat, with nearly a quarter of all exports going to Australia. Imports rose 16% to $48.5 billion, with the main contribution coming from fuel costs.
Government 'stuck in neutral'
Labour Party leader Phil Goff says the Government needs to show the same forthrightness as the Reserve Bank to deal with the global economic crisis.
Mr Goff welcomed the cut to the official interest rate, saying it is warranted and will give much needed relief to families, farmers and businesses.
However, he says the Government needs to clearly set out how it intends to respond to a worsening recession, describing it as being stuck in neutral.
