While ANZ surprised the banking industry on Friday by passing in full the 25 basis points rate cut made earlier this week by the Reserve Bank of Australia, (RBA), Westpac also did the unexpected on the same day by pocketing 5 basis points.

ANZ Bank earlier announced that it will pass the 25 basis points cut by RBA which reduced the overnight cash rate to 3.25 per cent.

The ANZ decision was seen as a major step in favour of borrowers who have expressed dissatisfaction with the past decisions of the big four to keep part of the overnight cash rate cut or even hike their standard mortgage rate when the RBA retained the key lending rate.

ANZ's decision is also considered a landmark because the other banks usually followed ANZ's lead since the latter announced that it would not be dependent on RBA policy for its rate decisions but set the second Friday as its standard rate decision announcement date.

However, Westpac decided a few hours after the ANZ announcement to pass on only 20 basis points although it will pass on in full the 25 basis points cut to small businesses borrowers.

The ANZ rate cut, which takes effect June 15, would bring down the lender's key lending rate to 6.8 per cent which is the lowest among the big four. Westpac's lower mortgage lending rate, which takes effect June 18, would be 6.89 per cent.

A study released this week by the Australian Institute said that the big four collectively earn $6.2 million daily by not passing to borrowers the RBA rate cuts. The banks cited the higher cost of funding from overseas as their justification for holding on to part of the rate cuts made by the RBA.

ANZ Chief Executive for Australia Philip Chronican maintained that the bank's funding costs remain high despite the decision to pass in full the rate reduction. He explained that ANZ decided to pass in full the overnight cash rate cut because most of its borrowers do not directly benefit from the strong resources sector in Australia despite the release of strong economic growth data this week.

"The bottom line is that while deposit customers are receiving very competitive deposit rates, many of our borrowing customers are under pressure from a range of other costs," Mr Chronican said in a statement.

"The decision recognizes that, although we need to be realistic about funding costs and the challenges the global economic situation is presenting, ANZ also needs to absorb its share of the burden.

"We felt that reducing interest rates for home borrowers and for small business was the right decision in these circumstances.

"Hopefully this decision will help relieve some of the pressures that we know homeowners and small businesses are facing at present," he added.

Treasurer Wayne Swan, who has been pushing banks to pass in full the RBA rate cuts, urge other Australian banks to follow ANZ's footstep.

"The ANZ has really thrown down the gauntlet to the other banks to do the right thing or risk seeing their customers walk out the door," The Australian quoted Mr Swan.

Westpact Head of Retail Banking Jason Yetton justified the lender's unpopular decision.

"This has been a difficult decision...We have sought to balance the needs of our mortgage customers and with those of our millions of savers, particularly retirees who depend on the income from their deposit account," Mr Yetton was quoted by The Australian.

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