Two major Australian banks have now given their customers an extra 0.50% or more in interest rate hikes above the 1% given by the Reserve Bank since last August. The Commonwealth Bank became the second major bank after St George to lift interest rates in the past week and the third bank overall with an increase of 0.14%.

It joins St George and BankWest in lifting home loan lending rates. St George lifted its rates by 0.20% last Friday afternoon and the smaller Perth-based BankWest announced its 0.20% rate rise in newspaper ads on Tuesday.

The Commonwealth Bank announced this morning that, as a result of the continued increasing cost of funds, it was increasing its variable home loan interest rates by 0.14% pa. This means that the Bank’s standard variable rate home loan will increase from 9.44% pa to 9.58% pa and its basic variable home loan from 8.93% pa to 9.07% pa. The new rates will be effective from Monday 14 July 2008 for new and existing customers.

“Variable interest rates on some business loans will also increase by 0.15% pa, effective 14 July 2008”.

Ross McEwan, the CBA’s Group Executive Retail Banking Services, said in a statement announcing the increase, that “funding costs remain very high, with the cost of funding more than 1% (100bp), excluding any increases by the Reserve Bank, above the levels that were being experienced pre August 2007.”

St.George lifted its standard Home Loan Variable Rate 0.20% to 9.67% a year for new and existing customers. BankWest increased its standard variable loan rate by 0.2% to 9.55%, but left unchanged its popular Rate Tracker mortgage, which guarantees a rate of 1% under the standard rate offered by the major banks. It’s at 8.47%.

BankWest also lifted the interest rate on its regular saver deposit account by a 1% to 10%, a real sign of how desperate it is to attract money from investors. It means that the CBA has lifted its home loan rate by 0.51% above the 1% from the RBA in its four increases from last August to March of this year. St George has lifted its rates by 0.65% more than the RBA’s rises.

So it’s no wonder the home loan market and building approvals are falling steeply: housing finance fell to an eight year low in May, according to figures out earlier this week from the Australian Bureau of Statistics. When you consider that home lending, retail sales and other sectors are also being hit by record petrol prices, it’s no wonder consumer confidence is at a 17 year low and why business confidence is also down sharply.

The CBA’s rate rise coincides with another sell off in bank shares today after the National Australia Bank warned it might have to make a provision for $1.1 billion of Collateralised Debt Obligations. The bank said the CDOs were still paying interest but there was a chance they could go bad.

As disclosed at 31 March 2008, the Group has an exposure of US$1.1 billion to collateral debt obligations (CDOs) via the provision of liquidity lines to conduit financing vehicles.

Given the uncertain economic environment and rating downgrades, a collective provision of $181 million was established at 31 March 2008 in respect of this exposure. Since that time the economic environment has deteriorated further.

These exposures are being actively managed to minimise the potential for loss. However, notwithstanding that these CDOs are currently meeting all principal and interest obligations, there continues to be a risk that further provisioning may be required.

Bank shares fell on this news, and on reports from the US of more concerns about struggling investment bank, Lehman Brothers, and more concerns that the big mortgage groups, Fannie Mae and Freddie Mac, will need billions in new capital, with the US Government the only possible source because of the continuing fear of debt and housing investments.

The market was held up though this morning by a strong rise in BHP Billiton and Rio Tinto share prices. The Commonwealth Bank fell more than 70 cents to under $40 on the news from the US and its rate rise. The NAB fell more than $1 to around $26.60 a share.

If borrowers are despairing at the ever-rising cost of money, there’s one brief bit of good news from the July Roy Morgan Consumer Confidence survey, which shows a small rise from June.

Morgan said the July reading was 92.0, up 1.3 points from June but still a massive 34.8 points lower than July 2007. That’s contrary to the fall registered by the rival Westpac/Melbourne Institute survey, released on Wednesday, which showed confidence at a level not seen since the end of the 1991-92 recession.

Morgan said: “The improvement in the Roy Morgan Consumer Confidence is due to more Australians feeling optimistic about their personal financial situations next year. Now in July, 35% (up 4%) of Australians expect to be better off financially than they are now, while only 29% (down 2%) expect to be worse off.”

“While the number of Australians who say they and their family are financially better off than last year is only 28%, this is an improvement of 6% since June. The number saying they felt worse off dropped 3% to 40%.

“More Australians (36% – up 3%) say that now is a good time to buy major household items, and 32% (down 6% – the lowest since March) say that now is a bad time”

The survey also showed that Australians are still pessimistic about the future for the Australian economy, with 48% being less optimistic, up 9% and the highest reading since September 1993. It should be pointed out that in September 1993, Australians might have been less optimistic but they were wrong on the economy — we were just starting the long upswing that has continued unabated since then till now.

An omen for the economy again, or a better reading of the changing and volatile circumstances?