Labour leader Andrew Little has warned the big banks to pass on the official cash rate cut made by the Reserve Bank or he will take measures to give them no choice.
Andrew Little said a serious question to ask was, what was the the point of the OCR "if banks are not going to follow the guidelines?", according to Fairfax Media.
Little has said he would consider legislating to force them to pass on reduction, though if he did it would be "with great reluctance and a heavy heart".
After the OCR cut was made last week, the big banks have not passed on the full 25 basis point cut, staying within the range of 10-20 basis point cuts.
The government was quick to reject Little's move, with John Key saying the Labour leader's comments show 'a lack of understanding of banking,' according to the New Zealand Herald.
"What he's basically saying is when the Reverse Bank puts the base rate up, he would be forcing home owners to pay a higher interest rate," said Key.
He added that lending rates were influenced by other factors along with the OCR, especially international costs of borrowing.
Finance Minister Bill English said forcing banks to cut interest rates was a bad idea.
"We've tried politicians setting interest rates before back in the 1970s and 80s and it doesn't work."
Little said he would start with "pretty serious talking, you might say 'stiff-arming'".
"If they are not responsive to that I guess you've got to look at your option," said Little.
"When you're in government you have the power to legislate but I think you've got to have a pretty serious talk to the banks about expectations," Little said.
"If the Government's expectation is that the banks will pass on - certainly in this case drops in the OCR [Official Cash Rate] - to lenders from banks then the Government should state that and be very firm about it and remind banks it does have powers banks don't have."