Australia's big four banks have been accused of profiteering by hitting customers with unwarranted interest rate rises.

The Reserve Bank of Australia says the country's major banks have been escalating rates at a level inconsistent with their costs of funding.

"For the major banks, the increases in lending rates have more than fully offset their higher funding costs," the central bank said.

Aside from actual interest differentials, many of the big four banks have also unilaterally increased margins by as much as 400 to 500% relying on covenants put in place before the global financial crisis.

Competition among the banks has been sharply reduced in recent times with the absorption of two lesser, but highly competitive, banks being absorbed by the "big four." Bankwest has been taken over by the Commonwealth Bank, while Westpac has merged with St George.

The Australian banks have been criticised by consumer groups and the country's political leaders, for their actions on rates. While many businesses and major corporations have been struggling, and homeowners have been hit by rising mortgage costs, the Australian banks have been reporting multi billion dollar profits. The Commonwealth Bank recently reported a record net after tax profit for the half year ended 31 December 2009 of $2.914 billion, an increase of 36% on the prior period.

The Reserve Bank says the big four banks were the worst offenders when it came to excess pricing. Just a 25 basis points excess relates to billions of dollars in additional revenue, it says. Increases in margins at the CBA are believed to have been a major contributor to that bank's record half year profit.

The Australian big four banks are among the best-performing in the world. Their aggregate profit this year, following the worst global recession since the depression, will be in excess of $20 billion.