MPs are keeping the heat on banks over interest rates with a new critical report.

Parliament's finance and expenditure select committee's report into the Reserve Bank's June monetary policy statement says there is room for banks to reduce their short-term lending rates further.

The committee lashed out at banks last month for failing to reduce mortgage rates and for protecting their profits.

The Reserve Bank also released analysis recently which found the pricing of floating rate mortgages appeared "unusually" high in recent months. MPs sought an inquiry but Government MPs voted down the idea.

The new report details the committee asking Reserve Bank Governor Alan Bollard how far above reasonable were the short-term interest rates set by banks.

"He suggested that the banks have set their interest rates higher than conservative interest-rate settings would require," the report said

The MPs urged banks to lower them.

On medium-term rates, Bollard said the main issue was the effect of increased borrowing internationally.

"However the Reserve Bank said that the upward pressure on medium-term interest rates had been eased to an extent by the narrowing gap between longer-term interest rates in New Zealand and those in key offshore markets," the committee said.

It said it was concerned farmers faced a triple whammy of a strong dollar, falling commodity prices plus interest costs and urged banks to take that into consideration.

Bollard told the committee the Reserve Bank was monitoring the situation, but banks and farmers had increased lending and borrowing significantly over the past two years in the face of warnings.

MPs questioned Bollard about banks' profits in a time of recession.

He said margins between lending and borrowing would be more relevant than profits.

Interest margins were high, but banks had increased equity capital more than required by regulation, he said. They "were trying to maintain high profitability in order to keep strong credit ratings in the presence of economic uncertainty".

The committee said the Reserve Bank should pressure banks not to widen margins unjustifiably.

In response to questions about whether he had enough tools, Dr Bollard warned against distortionary effects or regulation.

In a transcript of questions, Labour's David Cunliffe asked if Bollard thought the proposed inquiry would have been useful.

"I think it would be very helpful if the select committee were to hear from the banks on this," said Bollard.

Cunliffe also asked if the Reserve Bank had used powers on capital adequacy arrangements such as capital ratios.

Bollard said he had not considered it for interest rates but had seriously looked at it to try slow down bank lending.

"We went so far as doing a simulation on banks as they were two years ago to see what that would involve."

But the tool was not very sensitive, he said, as banks held enough capital to meet changing market conditions.

NZPA