Westpac has been the first major bank to respond to the RBA hike, with an increase almost double that of the Reserve Bank’s. Their variable mortgage rate will rise by 0.45 per cent, comfortably above the 0.25 per cent increase from the RBA.

Rumours have been simmering for months that the major banks may soon look to hike above the central bank, but the news still came as a surprise.

Westpac said their hand was forced by volatile funding markets and intense competition for deposits.

“The interest rate changes Westpac has announced today reflect the continuing cost pressures we are experiencing in wholesale funding markets, as well as an increase in the official RBA cash rate,” Peter Hanlon, of Westpac Group’s executive retail and business banking, said. “Both components, along with the higher rates we are paying on customer deposits, contribute to our increasing average funding costs.”

“These changes are regrettable, however.”

The competition for retail deposits has been due to the banks looking for ways to shield themselves from the volatility of funding markets in the wake of the global financial crisis.

Treasurer Wayne Swan will be disappointed with the Westpac decision, having earlier said that the banks should be in a position to move in line with the central bank.

“I don’t believe there is any justification for banks to pass through more than the official cash rate which is decided independently by the Reserve Bank,” he said in an interview after the Reserve Bank announcement.

The other major banks have yet to announce their interest rate reaction to the RBA’s decision.