What we have at the moment is a cash rate lower than what is deemed appropriate by the central bank, according to Reserve Bank of Australia (RBA) Deputy Governor Philip Lowe.

"While it's difficult to be precise, the cash rate today is in the order of 1.5 percentage points lower than it would have been," Mr Lowe said in a speech before the Australian Conference of Economists held on Wednesday in Melbourne.

The 3.5 per cent interest rate currently in effect was largely meant to balance out the generally higher borrowing cost offered by major Australian banks, which have been insisting on imposing rates that were independent from the policies rolled out by the RBA since November 2011.

The RBA has sheared off 125 basis points since late last year but local banks, specifically the major ones, have been adamant not to pass on to customers the full cuts, arguing that the measures were necessary to protect their profit margins and reduce their dependence on offshore funding.

"In effect, what we are seeing as a result of both market and regulatory developments is an increase in most interest rates in the economy relative to the cash rate," Mr Lowe was reported by The Australian as saying.

But with the easing intervention adopted by the RBA, the country's cash rate was set on lower level "than would otherwise have been the case."

It would have been a totally different picture had local banks were able or willing to offer more attractive standard variable mortgage rates to Australian borrowers, Mr Lowe said.

He noted that before the crippling financial downturn in 2008, banks only charged 150 basis points higher than the official cash rate as compared to today's average level of 270 basis points as against to the RBA's rate policy.

The discrepancies, Mr Lowe offered, were mostly due to the restricted flow of cash going through the banks as business opted to finance their activities by borrowing from the market and bypassing lenders that slap high rates.

Also, Australians wary of the financial crisis seemed to have decided that holding on to their cash is much safer, again eliminating finances that would have been available to banks that inevitably led to higher borrowing costs.

While banks appear to be flourishing as manifested by their latest financial results, real financial woes remain as threats for lenders no thanks to the credit crunch that is happening in Europe and the weak recovery of the U.S. economy, Mr Lowe said.

Mostly their impact in the local setting is seen through volatility in the marketplace and regulatory restrictions, said the RBA official.

It was noteworthy that Australian banks were largely insulated from the global financial crisis because they operate on a domestic economy that is healthy enough and their functions were supported by the financial industry's strict lending policies, Mr Lowe said.

Local banks also benefitted from the sound judgements being dispensed by regulatory authorities, he added.

"It is worth repeating that the Australian banks have fared better than many of their international peers over recent years," Reuters reported the deputy RBA chief as saying.