The return of the credit crunch and the rise in short term money market interest rates has produced the second round of non-Reserve Bank driven rate rises from a major bank.

Adelaide Bank, which runs the biggest share margin finance business in the country, depends heavily on short term market money to finance its home loans and will raise rates on its wholesale mortgages by 0.25% from tomorrow. The bank already lifted rates in August-September after the first credit crunch: that was in addition to the RBA rate increase on August 8. This week’s increase is in addition to the RBA rate rise early last month.

Driving the rise is the continuing upward pressure in domestic money markets where rates on 90 and 180 day bank bills hit 11 and a half year highs on Thursday and Friday as the Reserve Bank again added liquidity to the interbank market. The pressure is coming on the yields of 90 and 180 day paper: the yield on the short term 30 day bill hasn’t moved up as much.

Yields on 30, 90 and 180 day bills ended October at 6.80%, 7.01% and 7.16% respectively. On Friday they ended at 6.94%, 7.25% and between 7.38% and 7.39% respectively. There’s now a solid half a per cent margin over the cash rate of 6.75% in the yields on 90 and 180 day bills and its that gap which is adding to pressure on banks like Adelaide, to lift rates.

Adelaide has just merged into Bank of Bendigo, which has a more stable balance sheet with a higher proportion of households providing stabling deposits and not the more flighty commercial, short term market money, where funding costs are based on bank bill and swap rates.

Overseas the credit crunch in Europe has seen the European Central Bank extend a lending deadline at the end of this month to help the euro-area banking system get through a period of unusually tight credit at year end.

The ECB and the Bank of England meet this week to look at rates but are considered unlikely to follow the Fed lower.

A week ago, the ECB restated a commitment it made in September to counter what it called the “re-emerging risk of volatility” in the overnight bank lending market,

Earlier last week, the Fed and the Bank of England announced measures similar to move by the ECB last Friday to push settlement of some loans out to 4 January and past the usual tight period at the end of the year.

The Fed is making a series of liquidity injections stretching into January, while the Bank of England says emergency loans needed by banks will come with longer than usual repayment terms.

But this hasn’t helped stop the almost remorseless rise in short term funding costs in Europe, Britain and Australia, and the sharp drop in the US rates, so that the margin between the short term US Government securities (three months to 2 years) is substantially higher than normal and around the levels set in August.