Stand by to be screwed by your “friendly” bank after the Reserve Bank boosted interest rates yesterday by 0.25% to 7%.

Competition in the home loan market has cooled because non-bank lenders have been forced to pull their horns in because the credit freeze and crunch has lifted the cost (or led to the unavailability) of wholesale funds from offshore or within Australia.

Westpac bailed out the branch and lending business of Rams, leaving the rump to struggle on with its old loan book and other non-bank lenders have lifted rates and curtailed their activities, meaning more and more home buyers (and businesses) have had to return to the likes of the CBA, Westpac, the Nab, ST George and the ANZ for their loans.

It’s a captive market, just like it was before the likes of Aussie Home Loans opened in the mid-1990s. But the banks here bear a tiny bit of responsibility for the rise in interest rates: they were involved in some off balance sheet investment tricks like their foreign peers (think Citigroup, Merrill Lynch Barclays) that have now come unstuck because of the credit crunch.

That means the funding costs of the banks have risen, and we will have to pay. And the Commonwealth Bank led the charge today lifting its home loan rates by 0.30% which is 0.05% more than the RBA increase.

This follows the bank’s increase of 0.10% at the start of last month which kicked off the out of sequence rises in mortgage rates by the banks which reached a maximum of 0.20% for St George and the ANZ.

The CBA’s move came today a day after it sought to quell market concerns that it would suffer losses by a change of accounting policy. The bank issued a statement denying that the change in accounting policy would result in losses being disclosed.

Instead, the Commonwealth says it will report “a small unrealised gain on derivatives used for hedging purposes”, when it announces its results for the half year to December 30, 2007 next Wednesday. The bank has now clawed back around 0.15% of the increase in funding costs flowing from the credit freeze and subprime mortgage mess in the US.

And CBA and no doubt other banks, will try and recoup the higher borrowing costs from customers. People holding credit cards, personal and car loans or business loans have already had the cost of their borrowings lifted, and now the bank has grabbed a bit more than the 0.50% rise from the RBA in November and yesterday.

And guess what, the RBA’s increase in rates will feed through into inflation this year, and so will the extra 0.15% from the CBA and the little bit extra from other banks. So when bankers warn about the economy and warn us to pull our belts in, you know they are talking through their profit and loss account and want us to pay more.