Westpac chairman Ted Evans told the Government yesterday that it should butt out of banks' interest rate decisions.Speaking at Westpac's annual general meeting, Evans said: "Australian governments must allow our institutions of strength - not least the banking system - the flexibility to adapt to a changing world. Only by so doing can they best serve all Australians."Interest rates will be set in the marketplace. Interest charged on loans and paid on deposits by Australian financial institutions, banks and others will be determined by competition amongst them."Evans, a former Treasury secretary, was making his last appearance as Westpac chairman. He retires after a decade on the bank's board.He said "challenges from abroad" would remain in 2012 and asked for less political interference as banks worked through the situation.Westpac chief executive Gail Kelly took up the theme. She said: "If, as many expect, conditions in Europe remain difficult or possibly worsen, there will be a continuing impact on the Australian banking system."This will directly affect the price and potentially the availability of credit."Higher funding costs are a reality and are continuing to place pressure on interest margins. We are very mindful of the impacts of interest rate decisions on customers but these must be balanced with what is economically responsible."