When ANZ Bank discloses its six-month profit next week, Phil Chronican, the lender's chief executive, will justify the bank's decision to raise mortgage and small business loan rates while the Reserve Bank of Australia (RBA) had retained the overnight cash rate for the third straight month at 4.25 per cent.

He will specifically point to the 18 points rise in the bank's funding cost as justification. In contrast, Mr Chronican pointed out that ANZ's variable interest went up by 12 basis points only.

"In the six-month period from October 1, 2011 to March 31, 2012, the average cost of ANZ's $75 billion stock of term wholesale funding increased every month, except in December 2011 when credit markets froze because of the European sovereign debt crisis and wholesale markets were closed globally," Mr Chronican said in a letter to The Age.

That means the net interest margin for ANZ went down. That rate determines the profitability of the lender.

Mr Chronican explained that the bank's average cost of term wholesale funding went up by 15 basis points from 118 basis points which is higher than the swap rate of 131 basis points. This was the result of the average cost of less expensive funding which reached 72 basis points above the three-month bank bill swap rate or the benchmark for interest costs, rising 165 basis points above the swap rate.

Reckoned against funding from bank deposits, the difference between the RBA overnight cash rate and the average interest rate that ANZ offers to deposits increased 28 basis points to 0.69 per cent from 0.41 per cent.

However, despite such justifications, ANZ is expected to find it hard to be understood by bank customers who have expressed their growing dissatisfaction with the opposite direction that the big four, which includes ANZ, vis-à-vis the Australian central bank's policy direction when it comes to interest rate. It is worsened by the prodding of Treasurer Wayne Swan for Aussies to bring their business elsewhere if they are not satisfied with the interest rate policies of their current bank.

"Other Australian banks increased their interest rates by between nine basis points and 15 basis points.... ANZ's cumulative increase of 12 basis points has meant that although it has increased rates more slowly, its mortgage and small business lending rates remain in line with our competitors," Mr Chronican added.

However, a spokesman for Mr Swan questioned the banks' defense and referred to the RBA board minutes for April that said wholesale funding costs had actually eased in recent months.

"We accept the decisions we make in an environment where funding costs are rising are not popular or easy, and in an uncertain economic environment many people have strong views about these decisions.... It is however difficult to have a strong informed public debate about these issues when people of influence in the community are not aware of key facts or are willing to misrepresent them," Mr Chronican argued.

The same issues are expected to be faced by the big four when the RBA meets in May. Expectations are high that after retaining the key lending rate for three consecutive months, the central bank would reduce it by 25 basis points next month.

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