Excellent point. They are so focused on short term populist rhetoric, each party trying to exceed the other's outrage, there's a real danger they could actually seriously stuff things up.
What really bugs me is that even if they could force banks to only raise and lower in line with the RBA or even if they could actually get banks to raise less than the RBA, the effect on mortgage interest rates would be negligible.
When the RBA lifted cash rates last week, it was because they wanted 'market" interest rates to rise 25 basis points, from about 7.4% to 7.65%, to keep inflation in check. The banks on average raised their interest rates by a further 15 basis points. It is this latter 15 basis points that one could expect to be saved by regulating the banks, but then only temporarily. That will hardly impact borrowers in any way. What's more, if the average market rate is sitting at 7.8% at the next meeting and the RBA thinks they should be at 7.65% (what they originally wanted), they will reduce cash rates by 15 basis points to get there on the assumption the banks will follow suit. So the effect of regulation is negligible and only temporary.
Let's say the banks not only had not increased their rates more than the RBA increase, but didn't move rates at all and fully absorbed the 25 basis point increase by the RBA. The RBA would have responded to this by increasing the cash rate by a further 25 basis points at their next meeting, assuming nothing else has changed in between. In fact the RBA would continue to increase cash rates until the banks market rates get to where the RBA wants them to be.
The next question is what about the 0.5% or so difference between the major four's rates and the other financial institutions. Couldn't borrowers save by moving their loans to these, assuming there are no costs involved with moving. This only works so long as a small portion of borrowers move. Since the majors hold the vast majority of mortgages, the RBA looks at their market rates in determining what to set cash rates to. Even though the other institutions have lower rates, they don't count in the scheme of things when it comes to the effect on inflation. But if borrowers en masse migrate then the RBA will look at the other institutions' rates as now having the greatest effect on inflation. So the RBA will simply increase the cash rate by the average differential between the big four's rates and the others. So borrowers are back to where they were.
Over the past 30 years, mortgage interest rated have been between about 5% and 19%. Such wild fluctuations have nothing to do with the banks. They are just tinkering at the edges.
If people/politicians genuinely want to reduce interest rates than they should be looking at government policies that effect economic parameters that the RBA is mandated to control. The NBN is a good example.