Treasurer Josh Frydenberg has asked the competition watchdog to investigate the banking sector over its refusal to pass on interest rate cuts to customers in full.

Key points: The ACCC will examine how banks make pricing decisions and look at the differences in prices paid by new and existing customers

The ACCC will examine how banks make pricing decisions and look at the differences in prices paid by new and existing customers The Government said the inquiry would help to ensure pricing practices are better understood and made more transparent

The Government said the inquiry would help to ensure pricing practices are better understood and made more transparent After years of rejecting calls for a banking royal commission, the Coalition is now increasing its pressure on banks

Since January, the Reserve Bank has reduced the official rate three times to a new record low of 0.75 per cent.

Mr Frydenberg said that the big four banks failed to pass them on in full.

The big four banks have passed on the equivalent of three quarters of the RBA cuts.

"It's costing someone with a $400,000 mortgage around $500 in higher interest payments than they otherwise should have to pay if these last three rate cuts were passed on in full," Mr Frydenberg told Channel 9.

"But it's not just these last three rate cuts where the banks have failed to pass them on, it's actually what's happened previously under the Labor government, there were 14 different rate cuts and only five of them were passed on in full.

"So clearly there's a structural challenge here, there's a pattern of behaviour and the Australian people are fed up."

He has asked the Australian Competition and Consumer Commission to look into the pricing of residential mortgage products and any obstacles customers face in switching banks.

It will also examine how banks make pricing decisions, look at the differences in prices paid by new and existing customers and the barriers that are preventing customers from switching lenders.

It will examine the entire sector but the Government has made it clear that the big four banks will be the focus.

Mr Frydenberg said customers are "sick and tired of the merry dance" as the banks have neglected to pass on the rate in full despite consistent calls from the Government and the RBA.

"The banks have just ignored that advice and that call," Mr Frydenberg said.

"We need the ACCC to use its particular powers to compel documentation to lift the hood and get to the bottom of this issue."

Mr Frydenberg ruled out introducing legislation to force the banks to pass on the rate in full, no matter the findings of the inquiry and ruled out increasing the bank levy.

He said he had phoned the chief executives of the big four banks on Sunday and told them the inquiry could help them "clear the air" and explain why they had not passed on the rate in full.

"[And] how they balance the competing needs of shareholders and customers and depositors and borrowers," he said.

"They are defending their patch and we'll continue to get the best possible deal for the consumer."

The Government said the inquiry would help to ensure pricing practices are better understood and made more transparent.

After years of rejecting calls for a banking royal commission, the Coalition has now been increasing its pressure on banks.

Mr Frydenberg has consistently urged customers to shop around for the best deal and consider taking their business elsewhere if they were not satisfied.

Opposition gives in-principle support to inquiry

Shadow Treasurer Jim Chalmers said Labor welcomed the inquiry in principle, but wanted to see the detail.

"Labor has been calling for the ACCC to play a bigger role here," Mr Chalmers told AM.

"With record household debt and stagnant debt under the Liberals you can see why customers are frustrated at the banks for not passing through interest rate cuts.

"The big banks are still very profitable by international standards so they shouldn't be doing the wrong thing by borrowers.

"We want to make sure that those interest rate cuts can do good in the economy, that means having them passed onto consumers."

The banks respond

A spokesperson for the Australian Banking Association said the organisation is reviewing the Government's request of the ACCC, but that it "will cooperate with any inquiry".

ANZ chief executive Shayne Elliott said the inquiry is a "good opportunity to provide facts in what is a complex space".

"Despite intense competition, there is cynicism in the broader community about interest rates for home loans," he said.

"We know we have not done a good job in explaining our position and we will be working hard to ensure this process delivers results."

Mike Baird, chief customer officer for consumer banking at NAB, said it was "an important opportunity to discuss the challenges of an increasingly low interest rate environment and engage in a broader discussion about how we support all our customers— both depositors and borrowers".

Westpac's spokesperson noted it was "too early comment" as the bank was waiting to see the terms of reference while Commonwealth Bank's spokesperson said the it was "currently digesting the implications".