The increases are likely to spur the other big four banks - NAB and Commonwealth - to hike their rates. Commonwealth and smaller rival the Bendigo and Adelaide Bank said their rates under under review. ANZ Bank chief executive Philip Chronican . . . expects a backlash against the rate rise. Credit:Justin McManus Caught on the hop The RBA earlier this week surprised pundits by leaving its key cash rate unchanged at 4.25 per cent when most had tipped a quarter-point rate cut.



Had the central bank lowered rates on Tuesday, analysts were expecting some or all of the big four banks to pass on only part of the RBA cut. Since the RBA didn't move, the ANZ's solo action - until Westpac joined in - is likely to draw even wider criticism as borrowers tally up their extra repayment costs. The out-of-cycle rate increases are aimed in part at maintaining profit margins despite resistance from borrowers and politicians. Job cuts are also likely to rise as demand for banking services, including loans, remains steady or shrinks.

The big four banks generated about $24.3 billion in profit last business year, helping them earn top ratings by credit agencies and placing them in the top ranks of banks worldwide. Dollar falls on move ANZ shares hardly budged to today's expected rate increase and closed down 0.9 per cent for the day at $21.42. However, the local dollar's slide accelerated on the news, pulling it down to $US1.0716, as investors bet the next move by the Reserve Bank would be a rate cut even as commercial banks head the other way. "It's clear than bank funding costs have risen and if more do pass on those costs to customers in a broad-based way that will tend to tighten financial conditions in the economy," said Paul Bloxham, head of Australian economics at HSBC. "If the RBA then judges that conditions are tightening too much it will respond by cutting the cash rate." Investors duly reacted to the ANZ move by narrowing the odds of an RBA easing in coming months. Interbank futures imply about a 54 per cent chance of a cut in March and are now fully priced for a move to 4 per cent by April.

Puiblic backlash expected ANZ's CEO for Australia Philip Chronican acknowledged the likely public backlash over ANZ's decision to decide on rates separately from the RBA, but said the bank needed to increase rates for the general well-being of the economy. “There has been much debate on banks in recent days," he said. "While we recognise our decision may leave some people frustrated and even angry, we believe Australia needs safe, well-run commercial banks that aren’t a burden on taxpayers and that can continue to lend." Federal Treasurer Wayne Swan immediately attacked ANZ's decsion and reminded customers they could find a better deal. '‘I think ANZ customers will be absolutely ropable with the ANZ,’’ Mr Swan said this afternoon. ‘‘The fact is that the major banks in this country are very profitable. Their net interest margins are back to where they were prior to the global financial crisis.

‘‘And what I say to Australians who are observing these decisions, this one from the ANZ, is you do have the capacity to walk down the road and get a better deal.’’ With Westpac lifting its rates - and other big banks likely to do the same - that walk might turn into a more of a hunt for better rates.



Westpac increase Sydney-based Westpac said raising rates was "never easy" but that the 10 basis-point increase was necessary to reflect the higher cost of raising money by the banks.



It was also a reflection of the intense competition for deposits, a previously cheaper source of funding, which had risen by 30 basis points - 0.3 of a percentage point - over the past four months.



‘‘While we believe that reducing rates in November and December last year was the right thing to do for our customers and the economy, higher deposit costs and higher wholesale funging costs since then make today’s move necessary,’’ said Jason Yetton, Westpac group executive, retail and business banking.



Mr Yetton said that by way of example unsecured five-year funding transactions raised overseas by banks to support lending in Australia were currently priced at around 2.3 percentage points over the benchmark bank bill rate. He said that in June last year the equivalent raisings were priced at or about 1.5 percentage points over the benchmark.



The cost of the increase to a customer with a typical $250,000 loan will be about $16 a month, Westpac said. Angry reactions on Twitter ANZ's hike adds just $6.50 per fortnight to the average $280,000 loan, but the decision has sparked plenty of angry reactions , both in comments on this story, as well as in the Twittersphere. Here's a selection:

Small business bite ANZ also raised its lending rate on loans to small business by 6 basis points, also effective from February 17.

Small and medium sized businesses will pay an extra $3 per fortnight on an average loan of $130,000, it said. While lifting its variable home loan rate, though, ANZ also cut its fixed-lending rate on three-year loans by 15 basis points, or 0.15 percentage points, to 5.99 per cent.



ANZ said 85 per cent of its customers are already ahead on their repayments, meaning they will not need to pay more as a result of the rate rise.



The ANZ's Mr Chronican also launched a defence of the bank and the wider industry.



"This month we faced a serious dilemma in our review, balancing the rising cost of bank funding including deposit customers’ interests in receiving highly competitive rates, and the expectation of borrowers that we keep lendingrates as low as possible,” said Mr Chronican.



“In December and January we absorbed the additional funding costs in the hope that funding pressures would ease and that no change in lending rates would be necessary,” he said. “However, margins in retail and business banking have now been squeezed for a number of months and we’ve taken the difficult decision to pass on part of the higher costs to customers while we also get on with taking action to reshape the bank for tougher times.” Profit week ANZ is scheduled to release its quarterly market update next Friday - just as today's rate increases kick in. Analysts expect ANZ's profit to come in at about $1.44 billion for the three months.

Westpac will also report its quarterly market update next Thursday with a cash profit of $1.55 billion expected by the market.



"The alternative of weak, constrained banks that we see in the United States and in Europe is a recipe for stagnation and recession in Australia," the ANZ's Mr Chronican said. NAB this week reported its quarterly cash profit rose 7.7 per cent from a year earlier to $1.4 billion. Commonwealth Bank will report its first-half results on Wednesday with analysts tipping a record profit of about $3.4 billion. The ANZ standard variable rate of 7.36 per cent and Westpac's 7.46 per cent compare with National Australia Bank's, currently the lowest standard variable rate of the big four banks at 7.22 per cent. Commonwealth’s SVR sits at 7.31 per cent. While ANZ is the only major bank to declare its own regular monthly rate settings, Bendigo and Adelaide Bank has indicated it is likely to follow ANZ's lead.

czappone@fairfax.com.au with Danny John and AAP

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