Labour leader Andrew Little has stepped up his attacks on the big banks, threatening to force them to cut interest rates if they don't pass on cuts by the Reserve Bank.

Little said he would not rule out legislating to force them to pass on reduction, though if he did it would be "with great reluctance and a heavy heart".

The big banks last week refused to match the full 25 basis point cut by the Reserve Bank, with cuts of 10-20 basis points on mortgages and even no cut by the BNZ.


Little said he would start with "pretty serious talking, you might say 'stiff-arming'".


"If they are not responsive to that I guess you've got to look at your options.

"When you're in government you have the power to legislate but I think you've got to have a pretty serious talk to the banks about expectations," Little said.

"If the Government's expectation is that the banks will pass on - certainly in this case drops in the OCR [Official Cash Rate] - to lenders from banks then the Government should state that and be very firm about it and remind banks it does have powers banks don't have."

The banking sector through good and bad had made big profits, and they could do better.

Little said a serious question to ask was, what was the the point of the OCR "if banks are not going to follow the guidelines?"


His move was immediately rejected by the Government, with Finance MInister Bill English calling it "a dumb idea" but he said there was an expectation the banks would pass on rate cuts, though it might take time.

Prime Minister John Key said it would mean that rates would also be forced up by the full amount of official interest rates rose.

Even Labour's ally the Greens poured cold water on the idea with spokeswoman Julie Anne Genter saying it was not the most effective option.

She favoured giving state-owned Kiwibank the mandate to compete on rates, rather than maximising its return to the Government.

Little's comments follow his call at the weekend for banks to be "stiff-armed" against the wholesale forcing of dairy farmers off their land after a drop in dairy payouts.

He said the banks should show "forbearance" and he called for a crisis summit to address the problems facing the dairy industry.

"Offshore banks send billions of dollars overseas each year while the Prime Minister talks about a thousand dairy farmers being forced off their land because of bank debt," Little said.

"Forced sales will only mean more of our productive land will end up in overseas ownership."