Australia's longest-serving treasurer believes banks can afford to pass on any interest rate cut in full as the Federal Government tries to lower home buyers' expectations.
The Reserve Bank is widely tipped to cut the official rate by up to 50 basis points when it meets tomorrow.
Former treasurer Peter Costello, who now sits on the Opposition back bench, argued that banks could afford to pass on the cut in full.
''Prima facie, they should, yes, because they've already taken 50 basis points. They're already in front, they're highly profitable, they're well capitalised.''
But Treasurer Wayne Swan tried to dampen consumers' expectations, prompting Opposition claims that he was putting the profits of the big banks ahead of the interests of ordinary Australians by refusing to demand that banks pass on the entire expected cut.
''If the Reserve Bank were and I stress were to cut official cash rates, then that would be a welcome move,'' Mr Swan said.
''What I would expect from the banks is a maximum possible pass on of that rate cut.''
Mr Swan conceded the Government had come down a lot harder on the banks a month ago, urging them to pass on the rate cut in full to their customers.
''We're in very different circumstances from where we were one month ago,'' Mr Swan said.
''So the situation today, from a month ago, is vastly more complicated and banks are facing much higher borrowing costs. The capacity of the banks to pass through any official rate cut will vary from bank to bank.''
Short-term borrowing costs in Australia had ''blown out'' and the US credit crisis had caused turmoil in financial markets. The credit crisis had triggered the Bush Administration's $US700billion bail-out of the banking sector.
Mr Swan said the package was ''absolutely essential''.
''[But] I don't there's any magic bullet here,'' he said. ''There's no doubt we're going to go down a rocky road for some time to come.''
Deputy Opposition Leader and treasury spokeswoman Julie Bishop said Mr Swan was acting like the head of a big-four bank.
''In the Reserve Bank's latest Financial Stability Review it is pointed out that our banks are strong, they are well capitalised and they are making record profits,'' Ms Bishop said yesterday.
''Yet, on the other hand, Mr Swan is telling the Australian people that banks cannot afford to pass on an interest rate cut should the Reserve Bank cut interest rates.''
''Mr Swan should stop acting like the CEO of one of the big banks and act like the Treasurer of Australia.''
Deputy Prime Minister Julia Gillard said the Opposition was playing ''cheap politics'' but the Government was acting in the ''national interest'', even if it proved unpopular.
''Well, we're prepared to take a poll hit to do the right thing,'' Ms Gillard said.
''The Government believes in dealing with these economic circumstances responsibly, prudently, and we believe in telling the Australian people the truth about them.''
Ms Gillard said the Government wanted to see Australians benefit from a rate cut because ''we know how far they have suffered. We've seen them suffer through 10 interest rates increases in a row under the Howard government, so we obviously want to see them benefit from a rate cut should the Reserve Bank determine to cut rates.
''But we also know these are difficult times around the world.''
Ms Bishop said the banks had increased their margins by half a percentage point above the official cash rate since the start of the year by arguing they were facing increased funding costs.
''That's when interest rates were going up and yet they still recorded record profits. We need the banks to step out from behind Mr Swan and tell the Australian people why they should get the benefit of an interest rate cut and not the small businesses, the home owners, the families who need relief at this time.''
Analysts are predicting a fall of about 1 per cent on the Australian sharemarket when when it opens today, with the futures index pointing to a loss of 48 points.
with AAP
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