"This is just another one of their ... lunatic fringe-type ideas," he told reporters in Canberra. Mr Swan jumped on the remarks saying not even Mr Hockey's own party was prepared to support his "latest piece of ill-considered rubbish". "This is an absurd intervention from Mr Hockey," he told AAP. The political ruckus over interest rates comes two weeks after the Reserve Bank held off lifting its key cash rate, surprising markets and pleasing borrowers. That reprieve, though, may be short-lived, with analysts predicting an interest rate rise when the RBA board meets on November 2, particularly if inflation figures reveal a jump in prices.

'Social compact' Mr Hockey refused to back down from his comments, instead using a late-morning media conference to suggest a "social compact" concerning the role of banks in Australia. "Over the past three years, Australian taxpayers have stood up for the banks and it has been right to do so," Mr Hockey said, citing the examples of government support for mortgage-backed securities purchases and government guarantees for funding and deposits during the financial crisis. This is just another one of their...lunatic fringe-type ideas "In return, Wayne Swan on 30 separate occasions warned the banks not to go further [on mortgage interest rate rises] and they did," he said.

"So I would say to you, the government clearly does not have the confidence of the banks," Mr Hockey said. "Clearly the banks are ignoring the government." Mr Hockey called for a debate about the banks' role in society, as two of the major banks are aggressively expanding into Asia at a time they are "effectively being underwritten by taxpayers". ANZ Bank and Commonwealth Bank have both made inroads into Asia to capitalise on the region's surging economic growth. Intimidated Mr Hockey said the banks had successfully intimidated the government into weakness.

"They’ve conned the government into believing that the costs of raising money are continuing to grow," he told ABC Radio. Yet the minutes of the October meeting of the Reserve Bank board, released this week, showed the banks' funding costs had been "relatively flat over recent months". The major banks have flagged possible increases in variable home loan rates beyond any central bank rises in the cash rate. Mr Hockey’s frontbench colleague Malcolm Turnbull was reluctant to say how Parliament could intervene. "Parliament has got plenty of legislative scope ... but I’m not aware of any precedent for Parliament regulating interest rates," he said.

Rate rises in prospect The main bank lobby, the Australian Bankers Association (ABA), today rejected Mr Hockey's call for intervention on rates, saying it was "surprised" by the suggestion. In recent weeks, the major banks have flagged possible increases in variable home loan rates beyond central bank rises in the cash rate. Ralph Norris, chief executive of the Commonwealth Bank, last week indicated that the big banks were preparing to raise rates beyond those of the central bank. "I think there's no doubt that when we look at current funding costs, rates are going to increase," he said.

ANZ chief executive Mike Smith reiterated this week that banks were under pressure to lift rates to cover rising funding costs even if the RBA left rates unchanged.



"At some stage, something will have to give," he said. Financial markets were this morning rating the prospect of a rise in the RBA's official interest rate on Melbourne Cup Day, November 2, as just over a one-in-three chance. Inflation figures due out on October 27 are widely seen as crucial for determining when the RBA will lift the cash rate to 4.75 per cent at its board meeting next month. Pressure levers Mr Hockey said he had given the Treasurer 24 hours to use a range of levers to pressure the banks to limit rate increases. "He's failing to do his job properly," he said.

Mr Swan was scathing in his response to Mr Hockey's demands: "Mr Hockey was asked time and again [during the interview] what he would do differently, and had no answers, just incomprehensible bluster." "Just last week we had the shadow finance minister advocating the government intervene with the floating dollar. "Now we have the shadow treasurer saying we should jump in the time machine and remove the RBA's independence by re-regulating interest rates." 'Reserve power' "We're surprised by any suggestion there should be price controls put in place," ABA chief Steven Münchenberg said.

He conceded the Banking Act of 1959 did have a clause regarding price controls, but he described it as a "reserve power" put in place in the post-war era. "I don't think for many decades there has been any major party seriously considering implementing price controls," said Mr Münchenberg, who described them as a distortion on the economy. "We're surprised at the faintest suggestion they would even consider such a move," he said. 'Nothing changes' Opposition Leader Tony Abbott, meanwhile, said the government was all talk and no action on the issue.

"Every time interest rates go up, the Treasurer goes out there and says how terrible it is but nothing changes," he told reporters in Canberra. "It is an ineffectual government, which is basically being stood over." Mr Abbott said under previous Coalition governments bank interest rates went up or down in accordance with rates set by the Reserve Bank. "This is not a government which is as good at managing global pressures as its predecessor," he said. Loading

"We didn’t see this kind of behaviour by the banks under the former government." AAP, with Chris Zappone, BusinessDay

