Aug. 10 (Bloomberg) -- Australian Deputy Prime Minister Julia Gillard stepped up pressure on the nation's banks to pass on to borrowers any cut in official interest rates.

``If official interest rates were to fall, then we expect banks to pass that on to mortgage holders,'' Gillard told the ABC Television's Insiders program today.

Her comments echo those of Prime Minister Kevin Rudd, who said in Beijing on Aug. 8 that lenders ``have a responsibility'' to pass on central bank rate cuts to mortgage holders. Reserve Bank Governor Glenn Stevens signaled this week he may lower the overnight cash rate target from a 12-year high of 7.25 percent for the first time in seven years.

``It would be good for the banks to flow through any rate cuts,'' said Malcolm Watkins, Melbourne-based executive director Australian Finance Group Ltd., the nation's largest mortgage broker. ``But there is also the matter of the banks' higher costs of funds.

``We think the Reserve Bank needs to consider something in the line of a 50 basis point cut,'' Watkins said today in a telephone interview. ``Then we may expect 30 to 35 basis points of that to be passed through and 15 put back into the banks' margins.''

Australia's banks have faced government criticism for raising mortgage rates by more than the central bank increased its benchmark this year.

Loan Repayments

The nation's five largest banks have added an average 105 basis points to mortgage rates in 2008 as the global credit squeeze drove up funding costs. The central bank has added 50 basis points to its benchmark in that time. A basis point is 0.01 percentage point.

The increases have added A$250 ($224) to monthly payments on an average A$250,000 home loan, according to the Real Estate Institute. Households spent 38 percent of their incomes repaying mortgages in the March quarter, the most in the 22 years that the institute has measured affordability.

Stevens said on Aug. 5 there is increasing ``scope to move towards a less restrictive stance,'' stoking speculation he will cut borrowing costs as soon as next month.

Consumer confidence slumped in July to the lowest level in 16 years and home-loan approvals tumbled in June to a four-year low. House prices fell in the second quarter for the first time in almost three years. The economy, in its 17th year of expansion, grew at the slowest pace in almost two years in the first quarter.

Currency Slumps

The benchmark interest rate will be reduced by at least 25 basis points to 7 percent when the central bank's board meets on Sept. 2, according to 18 of 25 economists surveyed by Bloomberg News on Aug. 8.

Currency traders are also betting on a cut. The Australian dollar fell below 90 U.S. cents on Aug. 8 for the first time since March. The currency dropped to 88.87 U.S. cents, down from a 25-year high of 98.49 cents on July 16.

Expectations of a reduction in the central bank's benchmark have caused a drop in the rate banks charge each other for loans. The Australian three-month bank bill swap rate fell to 7.32 percent on Aug. 8 from 7.59 percent before Steven's Aug. 5 comments, and 7.83 percent three weeks ago.

That prompted Australia & New Zealand Banking Group Ltd., the nation's fourth-largest bank, to cut its fixed-interest-rate loans by between 11 and 50 basis points on Aug. 8.

Westpac Banking Corp.'s Chief Executive Officer Gail Kelly said the same day she would ``love to pass through the full'' amount of any central bank cuts to the majority of borrowers, who hold variable-rate mortages. Almost 90 percent of Australian borrowers have variable-rate loans, which have historically moved with the Reserve Bank's benchmark.

Regulation Threat

The government may increase regulations on banks if they are ``not competitive enough,'' according to Treasurer Wayne Swan. ``We'll keep an eagle eye on banks as we go through the year,'' he said Aug. 7.

Assistant Treasurer Chris Bowen also added to pressure on banks today over interest rates. ``Any future cuts are a matter for the Reserve Bank, but we certainly would expect reductions to be passed on,'' he told the Ten TV Network's Meet the Press.

Bowen was backed by Chris Lamont, senior executive director of the Housing Industry Association, who said in a telephone interview today: ``You have got record profits from the Australia banks. Yes there has been an increase in the wholesale costs of funds, but surely some of a rate cut should be absorbed against profit forecasts.''

The Reserve Bank has raised its rates four times since August last year to cool inflation that hit 4.5 percent in the second quarter. The bank targets annual price increases of between 2 percent and 3 percent.

``There is a tightening of credit and an increase in the costs, and that is, of course, affecting Australia,'' Reserve Bank of Australia board member Roger Corbett said today on Sky Business TV.

``There is a very strong mineral base in Australia; we have a very strong, broad-based economy, strong banks and a great basis for confidence.''

To contact the reporter on this story: Laura Cochrane in Melbourne at lcochrane3bloomberg.net.

Last Updated: August 10, 2008 00:35 EDT