Why are banks lifting their mortgage rates after the Reserve Bank left official interest rates unchanged?

The banks say costs have increased as a result of the economic crisis in Europe, which has made money more expensive for all banks to borrow. They also blame ''intense competition'' to attract depositors. Banks also argue they need to move independently of the Reserve Bank because their funding costs now bear little relationship to movements in the Reserve's cash rate (the rate of interest charged on overnight loans between banks).

What is the significance of yesterday's moves?

They signal a more independent stance by the big banks on variable mortgage rates on most home loans. The bad news for all home borrowers is that this is likely to encourage other lenders to follow suit. It also casts doubt on whether any Reserve Bank rates cuts will be passed on in full to borrowers. But there is some good news. Despite what the banks claim, the Reserve's cash rate still has a powerful influence on other interest rates and forms the base on which the structure of interest rates in the economy is built. If banks increase the overall margin between the official cash rate and what they charge home borrowers, the Reserve is likely to set the cash rate lower. This would allow banks to keep their higher margins but set interest rates lower.

How much of recent Reserve Bank rate cuts have been passed on to borrowers?

The Reserve Bank cut interest rates by a total of half a percentage point in two steps late last year. Existing borrowers have enjoyed the full cut. Reserve Bank figures yesterday show average interest rates on typical variable-rate housing loans for new borrowers have fallen by slightly less than the cash rate.

Matt Wade