Another Turn Of Rates Screw

ANZ is expected to follow its three rivals in raising rates by more than the Reserve Bank's 25 basis points.

Commonwealth Bank yesterday lifted its variable mortgage rate by 35 basis points, the biggest increase so far of any of the Big Four banks.

ANZ boss Mike Smith last week flagged a rate increase above the Reserve Bank's increase, and warned that banks could be forced to cut back on loans.

Like National Australia Bank and Westpac last week, CBA said it had no alternative but to raise its interest rates by more than the Reserve Bank's 25 basis points.

CBA said interest rates had to reflect to some extent the increased borrowing costs caused by the global credit squeeze.

Its new variable home loan rate of 9.32% will be effective from March 12. Variable interest rates on business loans will also increase by 35 basis points from March 12.

Like the other banks, CBA has pointed to rising costs caused by the squeeze in global credit markets. And it said that even the latest increase would not cover all those costs.

CBA's group executive, retail banking services, Ross McEwan, said the bank had absorbed a huge proportion of increased funding costs since last August.

"Unfortunately, the volatility in global markets remains and we have seen funding costs continue to increase, particularly since February as funding from global markets has become tighter and as a result more costly," Mr McEwan said.

"Despite this latest increase, which can be directly attributed to the increased cost of funding experienced by all banks, we are still maintaining a balance between the needs of shareholders and customers by continuing to absorb a significant portion of the additional costs being incurred."

Significantly, CBA has also changed its dividend reinvestment plan to strengthen its position when the credit squeeze bites harder.

It has announced it will stop buying back shares on market equivalent to the number it issued under the dividend reinvestment plan.

Rationing money in this way would save the bank $400 million and put it in a stronger position in what is expected to be a tighter market.

Last week, NAB increased its variable home loan rate by 29 basis points to 9.27%.

It was followed by Westpac, which raised its standard variable rate by 30 basis points to 9.27%.

Westpac has also claimed that the additional charge does not recover the full cost, saying it would make further adjustments if conditions did not improve.

In another sign of rising costs, Macquarie Group last week became the first prime lender to scale back its mortgage business.

The banks are being forced to raise their rates beyond the Reserve Bank's increase because they face higher costs acquiring raw material on global markets.

The credit squeeze means imported money is becoming more expensive by the day.

With tighter markets and credit risk, not only have the interest rates that businesses pay for short-term loans increased steeply, but the banks themselves now have to pay a premium on top of that rate just to do business.

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MALCOLM MAIDEN

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