John Edwards, who until last week sat on the board of the RBA, said the central bank would have intended that the commercial banks pass on in full the cut to interest rates worth 25 basis points. The Reserve cut rates to an historic low of 1.5 per cent on Tuesday citing concerns about low inflation and confidence that it would not spur excessive housing prices.

But the banks have only passed on part of the cut to borrowers:

• The Commonwealth Bank said it would reduce its standard variable home loan rate by 0.13 per cent. 
• ANZ decreased its variable rate by by 0.12 per cent
• Westpac reduced it's variable home loan by 0.14 per cent.
• NAB is cutting mortgage rates by the least, 0.10 per cent.

However, all the banks raised their rates for short-term deposits.

"I think the banks should have passed that on. I think it'd be helpful for the Australian economy and I rather think that's what the RBA would have intended," Mr Edwards said. "When you make a decision to cut by 25 basis points, you know, your intention is to affect household demand and lending and that affect is gonna be muffled," he added.

Mr Edwards was speaking in an interview with the ABC's 7.30 program, in which he was asked about the federal Labor party's call to hold a royal commission into the sector.

"I think some kind of inquiry would be helpful," Mr Edwards said, noting that the ageing population was becoming more dependent than ever on financial advice and services.

"You know, their authority in that area is becoming vastly bigger than it was even a decade ago and I think that's where we need to get a better idea of what the culture is and how good the performance and practice is.

Prime Minister Malcolm Turnbull called on the banks to pass on the entire rate cut on Wednesday.

"The commercial banks should pass on the full rate cut. They should pass it all on," Mr Turnbull told reporters.

"They should do that and if they are not prepared to do it - as appears to be the case - then their chief executives should explain very clearly to the Australian people and their customers why they have not done so," he said.

Opposition Leader Bill Shorten said the banks were thumbing their noses at the prime minister's "weak and pathetic empty talk."

"Yet again he has just wagged his finger at them and delivered another empty lecture. He is too weak and his government is too divided to stand up to the banks," he said.

"The decision by the banks to hold back the rate cut from hard-working Australians does nothing to help their credibility."

"Mr Turnbull will give the big banks another empty lecture and a tax cut. I'll give the banks a royal commission," Mr Shorten declared.

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