The Federal Government has called on all banks to pass on as much as they can out of next week's expected interest rate cut. 

The Reserve Bank of Australia is tipped to announce an official cut of 50 basis points, or half a percentage point, on Tuesday.

"Our position is clear: the banks should pass on as much as they can of any increase at any time," Assistant Treasurer Chris Bowen said.

"Of course, there have been interest rate reductions outside of the official interest rate reductions and the banks have indicated that in large part it's due to the confidence that's been restored in Australian banking due to our bank guarantee.

"We continue to talk to the banks and say that they should pass on as much as they can at all times."

Meanwhile, Mr Bowen denied the government's initial policy on unlimited bank deposit guarantees had exacerbated market instability.

"If you talk to bank chief executives - small and large Australian banks - they have told us publicly and privately that they support the guarantee as a very important measure to restore confidence in the Australian banking system."

Ten funds froze redemptions before the guarantee was announced, he said.

"And for those funds that froze their redemptions after the guarantee was announced, there've been significant withdrawals before.

"They didn't just all occur after the guarantee (announcement)."

The government's revised threshold of $1 million is a "very appropriate level for the threshold to be free", he said.

"If we had a lower threshold, for example $100,000, you would be still excluding many deposits of great value and so it's very important that we have ongoing stability in the banking system.

"We're one of the few developed countries that's got through this crisis without a major run on a financial institution.

"And we need to put this in context, if we continue to get through this crisis that would be in large part because of the bank guarantee that the government put in place."

AAP