New Zealand's largest bank, ANZ, announced late on Thursday that it would only reduce its variable mortgage rates by ten basis points, defying the expectation of Reserve Bank of New Zealand governor Graeme Wheeler that all of the bank's 25 bps cut would be passed on.ANZ NZ has commented in recent weeks on a rise in international funding costs that it equated to the effect of a 25 bps rise in the official cash rate, which prompted questions for Wheeler in a Parliamentary Committee meeting after the surprise rate cut.Wheeler was asked whether banks should pass all of the cut by Labour MP Stuart Nash, who said there had been speculation that falling Australian bank share prices might mean they hold on to the rate cut to boost their profit margins."Certainly you'd expect the floating rates to come down 25 bps, and the fixed [mortgage rates] will depend on a lot of factors, but one would expect that most of that would be passed on," Wheeler said in reply.Earlier, RBNZ head of macro-financial Bernard Hodgetts told the committee that the effects of the rise in foreign funding costs was "relatively mild" for banks at the moment, given they were currently funding only a small share of new lending from overseas borrowing because of strong local deposit growth."Banks are only raising a relatively small share of their funding from overseas at this point in time. They're continuing to see very strong deposit growth. Most of the credit expansion that's going on has been funded through deposits," Hodgetts said."If the upturn in international funding costs was to persist, it would start to have more of an impact on banks' funding costs. But at the moment the effect has been relatively mild," he said.He said he expected the bulk of falls in interest rates to be passed on to borrowers.Late on Thursday ANZ announced its decision to hold on to 15 bps of the 25 bps rate cut."Over the last 18 months, offshore wholesale funding costs have increased significantly. Until now, and unlike some other banks, ANZ has passed on all the recent OCR rate cuts in full," ANZ Spokesman Pete Barnao said."But international volatility has proved to be more than temporary so these extra costs now need to be reflected in our lending rates," he said.He said the decision would not affect most of ANZ's mortgage customers, given 76 per cent were on fixed rate mortgages, up from 36 per cent four years ago.