Swan stands firm on interest rates

Federal Treasurer Wayne Swan has again called on Australia's major banks to pass on any drop in interest rates handed down by the Reserve Bank (RBA).

Earlier this week Reserve Bank assistant governor Philip Lowe said a big fall in funding costs meant banks have no excuse not to ease the squeeze, but Commonwealth Bank chief executive Ralph Norris told AM he would not guarantee a rates cut.

"I don't think we live in a communist country. We will do what is commercially appropriate, what is prudent," he said.

"Therefore I don't know of any legislation that says that the Reserve Bank actually sets interest rates for commercial operations in this country."

But speaking today on ABC1's Insiders, the Treasurer has backed Mr Lowe's assessment.

"The public have a right to expect when official rates come down then rates set by the banks come down as well," he said.

The Reserve Bank is widely tipped to cut rates as early as September, however the major banks have been unwilling to commit to automatically following the RBA rate down.

Mr Norris has told ABC1's Inside Business bank costs are not solely determined by RBA rates and has highlighted the continuing role of global markets in dictating costs.

"We're in a situation where the Reserve Bank increases obviously had an impact on the 90-day bill rate and there has been a significant margin built up over that bill rate over the last 12 months, and then when you look at the offshore funding costs, particularly on the longer dated funding, it was a significant increase of up over 100 basis points," he said.

"So we ended up in a situation where we under-recovered about 16 basis points on average on mortgages."

Mr Swan, while acknowledging banks are facing increased costs in securing overseas capital, was adamant that a drop in the official RBA cash rate would result in lower costs for banks.

"The truth is a substantial portion of their borrowing costs comes down when the RBA takes a decision to move rates down," he said.