A Reserve Bank of Australia official says the RBA has cut its cash rate more than it normally would because the banks are not passing on the rate reductions in full.
RBA deputy governor Philip Lowe said in a speech in Sydney on Wednesday that for most of the decade before the global financial crisis it was normal for lending rates to move in lock-step with the RBA's cash rate.
"This has obviously changed over recent years as bank funding costs, and hence mortgage rates, have risen relative to the cash rate," he told the Australian Business Economists (ABE) Annual Conference.
"The board of the RBA has taken account of this in its monthly policy decisions.
"As a result, the cash rate today is around 1.5 percentage points lower than it otherwise would have been."
Dr Lowe said when funding costs ease the banks could return to passing on the RBA's cash rate cuts in full to borrowers.
"We are seeing some lessening of the pressure on bank funding costs. The wholesale spreads that the banks are paying are coming down," he said, answering questions after his speech.
"Perhaps we are seeing signs that the intense competition in the deposit market is easing off a fraction. It's a bit early to conclude that with confidence, but there are signs that is occurring.
"If both those trends were to continue, then you would expect to see some stabilisation in the spread between the cash rate and the mortgage rate and hopefully some decline.
"I don't think we're there yet but we are getting closer to it than we have been."
After the RBA's decision to cut the cash rate by 25 basis points to three per cent on Tuesday, three of the four big banks said they would cut their standard variable home loan rate by only 20 basis points.
The ANZ will review its variable rates on December 14.
When the central bank cut the cash rate by 25 basis points at its October board meeting the NAB, Commonwealth and ANZ banks cut their standard variable rates by 20 basis points and Westpac cut by 18 basis points.
In his speech on Wednesday night, called What is Normal, Dr Lowe also spoke about the strength of the Australian economy and the contrasting lack of consumer and business confidence.
He said Australia has had 20 years of uninterrupted economic growth and this had affected how Australians viewed the economy.
"Twenty years of good economic performance and rising asset prices raised our expectations of what is normal," Dr Lowe said.
"I suspect that this is one factor that explains why the public mood has been a bit flat over recent times, despite many observers outside our country viewing the Australian economy with some envy."
"If something happens year after year, there is a tendency to think it can continue to happen and some people start to make their plans accordingly."