Fitch Ratings downgraded over the weekend the AA credit ratings by one notch of three large Australian banks. As a result the long-term issue default rating of Commonwealth Bank, Westpac and National Australia Bank is now AA- which reflects their weaker funding profile.

It is the same rating as that of ANZ Bank, which Fitch also affirmed on Friday. The downgrade and affirmation was made after three weeks of review made by Fitch on the big four which cited higher funding costs sourced overseas as their basis in hiking their interest rates by 6 to 10 e basis points while the Reserve Bank of Australia (RBA) kept the overnight cash rate at 4.25 per cent on Feb 7.

Fitch cited the high reliance of the big four on overseas funding as the reason behind the ratings cut.

"Wholesale funding, particularly when sourced cross borders, has become more vulnerable to swings of confidence, and for the major Australian banks this risk is better reflected at a long term IDR of AA-," Fitch said in a statement.

The big four, however, had improved their funding mix over the past three years and cut their dependence on offshore wholesale term-debt markets to just 20 per cent of their total funding.

Lyn Cobley, the group treasurer of Commonwealth Bank, said the Fitch downgrade would likely not have any material impact on the lender's funding costs.

Annette Beacher, head of TD Securities, warned that the big four would likely hike their standard variable rates again in the coming months even if the RBA would reduce its rate which she forecast would be down by 50 basis points to 3.75 per cent.

Ms Beacher added that the RBA would likely wait for the key inflation data to be released in late April before it announces any major changes in the overnight cash rate.

Shane Oliver, chief economist of AMP Capital Investors, said he was not surprised by the Fitch downgrade since the two other major ratings agencies, Moody's and Standard and Poor's had previously downgraded the ratings of the big four. He said Fitch is just catching up with the two agencies.

RBA Governor Glenn Stevens, in his testimony on Friday before the House of Representatives Standing Committee on Economics in Sydney, said the Australian central bank expects growth to b close to trend and inflation close to target. However, he acknowledged risks surrounding the central view.

He also took note of the change in household behavior with people saving more and borrowing less which has proven to be a bane for the retail industry.

"The bank is quite aware of these difference and the pressures they bring to businesses and individuals. But we also know that monetary policy cannot remove the forces generating different paces of growth in our economy. We have to keep our eye on the overall performance of demand and prices. We are acutely conscious that history may offer limited guidance in assessing the net impact of the disparate and very powerful forces that are at work," Mr Stevens said.

Given those inputs, he insisted the setting of policy was about right for the moment, although the big four believe otherwise and proclaimed independence from RBA's overnight cash rate policy.

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