Australian banking major ANZ has defended its policy on interests in a letter addressed to The Age from its Australian operations chief Phil Chronican who argues that the cost of funding has increased substantially, and provided data to support his claim.

"The bottom line is that, taking into account's ANZ's funding mix of deposits and short and long-term wholesale funding, our funding costs are up 18 basis points over the past six months while ANZ's variable interest rates have risen by 12 basis points," he said.

Mr. Chronican is basically saying that the margin the lender makes on lending money to borrowers has fallen with respect to the cost of raising the funds. Net interest margins is what determines profitability for banks.

"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," he said.

Mr. Chronican says ANZ has had to raise the interest rate it pays to depositors by 28 basis points compared to the Reserve Bank of Australia's overnight rate. Last year the lender stopped the practice of making mortgage rate announcements following the monthly central bank meetings held on the first Tuesday of the month, and instead now reviews its rates on the second Friday of each month.

ANZ came under heavy criticism from politicians in particular Treasurer Wayne Swan for raising its interest rates by 6 basis points in February, despite the central bank holding the cash rate steady.

"Other Australian banks increased their interest rates by between nine basis points and 15 basis points," Mr Chronican said. "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."

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