The federal government and Reserve Bank have consistently called on the banks to pass on the cuts in full, but their advice has been ignored.

Now, Treasurer Josh Frydenberg wants to ensure the pricing practices of Australia’s banks are better understood and made more transparent.

“We need information about the cost of the funds of the banks and … why they’re not passing on these rate cuts in full,” Frydenberg told ABC News on Monday.

The Treasurer says the banks need to explain how they balance the competing needs of shareholders and customers.

Labor argues the government is being pressured into the move.

“The Treasurer has caved in to pressure from Labor and the media and the community and announced an inquiry by the ACCC into banking competition,” shadow treasurer Jim Chalmers told reporters.

“It was only little more than a week ago when Labor was calling for the ACCC to play a bigger role that the Government dismissed it as a distraction.

“So they have been dragged to this, kicking and screaming. They would rather not be going down this path. They are only going down this path because of pressure from the community and media and Labor.”

The official cash rate is at a record low of 0.75 per cent after the Reserve Bank of Australia cut interest rates three times this year.

But the big four banks on average passed on only 75 per cent of the total reductions to their customers.

This has prompted allegations of price gouging by the banks, which have previously blamed funding costs for failing to pass on reductions.

The inquiry, which will also include smaller institutions and cover the period from January this year, comes after an earlier royal commission into misconduct in the banking sector.

“There are a number of smaller lenders that have actually wasted no time in passing on these rate cuts on in full,” Frydenberg said.

“If the big four banks had passed on these 75 basis point rate cuts, then somebody with a $400,000 mortgage would be more than $500 a year better off in lower interest payments.”

The ACCC’s preliminary report is due by March 30 next year, six months before the final report.

-AAP

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