Westpac's chief executive Gail Kelly has indicated that the bank may move interest rates independently of the Reserve Bank of Australia.
Speaking at the Westpac annual meeting in Sydney yesterday, Ms Kelly said the cash rate has a very "tenuous connection" in the setting of bank prices.
According to Ms Kelly, the bank's interest rates are much more driven by term funding in offshore markets.
"There's no direct connection there between what we pay for money in those markets and what actually happens in the cash rate here in Australia," she said.
Ms Kelly went on to say flat credit growth, rising funding costs and a consumer shift into retail deposits were leading to tighter margins, which could ultimately encourage the bank to move on rates before the RBA.
"As a direct consequence of the turmoil going on in Europe, funding has become a more difficult issue, right at the moment term markets are effectively closed," Ms Kelly said.
"When they open up, our estimation is that the cost of raising money in term markets will be more than it was at any time during the global financial crisis. So indications of that will be less term funding, and it will be a lot more expensive."
Ms Kelly's comments come just one week after ANZ's chief executive officer Phillip Chronican said the bank would look to review "pricing changes for retail and small business variable interest rates on the second Friday of each month".
Mr Chronican said that in the face of the European economic and banking crisis the bank's decision on the size of the interest rate change has been "one of the most difficult we have made in recent times".
Retail banking margins have been contracting as the cost of funds have progressively risen over the last six months and this has made the relationship between the cash rate and mortgage rates less relevant than they were pre-GFC.
In the future ANZ will now align the pricing of its loan products more closely with its funding costs.
"Bank funding costs are now largely unrelated to movements in the Reserve Bank's official cash rate," Mr Chronican said.