Rising funding costs prompted major Australian banks to lift their mortgage rates despite the freeze on cash rate imposed last week by the Reserve Bank of Australia (RBA).

This was confirmed Tuesday by RBA assistant governor for financial markets Guy Debelle, who added that the upward movements started rolling out in the last quarter of 2011, about the same time that the central bank had its policy rates rolled back two months in a row.

Speaking at a Bloomberg-organised business forum in Sydney, Debelle revealed that "the repricing probably happened in the last quarter of 2011, but the general lack of issuance made it more difficult to observe."

He also hinted that banks were feeling the pressure of shrinking profits while at the same time "investors are demanding much higher compensation for bank credit risk now than they were in mid-2011."

Yet interventions coming from the European Central Bank in December 2011, which injected more than $600 billion into the Euro banking system, appeared to have largely stabilised the situation, Debelle said.

Major Australian banks, however, still saw fit to protect their profit margins by deviating from the official policy rate and pushing up their mortgage rates by up to 10 basis points, currently the levels being implemented by the Commonwealth Bank of Australia (CBA) and Westpac.

Almost simultaneously, the National Australia Bank (NAB) and the Australia-New Zealand Banking Group (ANZ) lifted their rates by nine basis points and six basis points respectively, with other banks immediately following suit.

While the recent rate moves surprised the Australian public, Debelle said that banks opting to increase their rates independent of the RBA's was hardly surprising.

"This global repricing of bank debt has clearly affected the Australian banks' wholesale funding costs," the RBA official noted.

Shane Lee of ANZ told BusinessDay that banks were somewhat compelled to increase their rates in only to establish a firewall against the ill-effects of the financial crisis still underway in the Euro zone.

Lee added that funding costs rose at the same time the RBA implemented rate cut backs in November and December last year, leaving the perceived gains almost negligible.

The overall situation only improved when the ECB stepped in and provided liquidity for Euro banks, which "have provided a bit of circuit-breaker, ring-fencing the European banking system to an extent," the ANZ analyst said.

But by 2012, funding costs have been improving, prompting Lee to predict that "if they keep moving in the right direction you may not see any more mortgage rate increases, unless the RBA does that."