The Prime Minister has ridiculed Labour's idea of strong-arming banks to lower interest rates.
Last week the Reserve Bank cut the OCR to a record low of 2.25 percent, but the major banks did not lower their mortgage interest rates by an equivalent amount.
John Key said Labour leader Andrew Little was ignorant for suggesting banks should be made to pass on the rate cuts.
Mr Little said the government should pressure the major banks to reduce their mortgage interest rates, and if he was Prime Minister he would consider going as far as legislating to make them do it.
In Parliament yesterday, Mr Little asked John Key whether he thought banks should pass on the OCR savings to struggling dairy farmers.
The Prime Minister said he would encourage banks to do that - but it was not as simple as that.
"By definition, if the banks are going to follow what Andrew Little was saying today, that would mean that when the OCR goes up they forcibly will have to pass on those increased costs to every home owner around the country and that just shows you how ignorant Andrew Little is when it comes to banking," said Mr Key.
But Mr Little said the Prime Minister was effectively allowing banks to hoard interest rate cuts.
John Key said there were lots of factors that came into play and banks tended to lend money to New Zealanders based on what was happening to international swap rates.
He said the government would be setting a bad precedent if it legislated to make banks pass the rates on.
But Andrew Little is not backing down.
He said the government must pressure the banks to pass on the rates because it was in everyone's interest for New Zealand farmers to stay in business.