Professor Fariborz Moshirian

It is clear problems in the euro-zone are causing upwards pressure on mortgage rates, and the latest report from the International Monetary Fund (IMF), warns economic growth could slide as a result of satisfying the Basel III banking rules. The current economic turmoil in Europe is causing the costs of borrowing to escalate around the world.

The Greek vote on austerity measures is welcome, and it appears that the Greeks are attempting to get their house in order: I certiainly have sympathy for the Greek people who are facing a number of challenges.

If the situation in Euro zone improves in the next few months – particularly if the European Leaders could contain the financial challenges in Portugal and then implement the Fiscal Compact – then the cost of wholesale funds may well improve later on this year. This will be good news to home buyers, however at the moment all lenders are seeing higher costs as banks become very wary of risk.

On Friday the ANZ and Westpac raised mortgage rates. If the Reserve Bank had cut rates it would certainly have helped matters, and all eyes must be on the next RBA meeting.

The ongoing European financial crisis is blamed in a working paper released by the International Monetary Fund, which indicates that there is currently a lot of pressure on Australian banks’ capital. The IMF says this is likely to tighten lending, and therefore Australia is likely to see a decline in growth, unless the RBA cuts interest rates to allow banks to offset the costs of meeting the stricter capital requirements.

It is import to treat the IMF findings with caution. Financial innovation and fierce international competition are likely to limit the extent to which stricter capital rules are likely to crimp credit growth. The IMF has downgraded growth forecasts for Australia, with the revised IMF estimates predicting 3% growth for the Australian economy. This is now more consistent with the recently revised RBA forecasts of 3.5% annual growth. The IMF recommends that monetary policy should continue to support economic growth, as long as inflation expectations remain anchored and unemployment stays low. However there are many more challenges.

The IMF adds risks to stability have increased but Australian banks were equipped to withstand “sizable shocks” in the mortgage market. However, the paper said a potential global downturn could necessitate more capital, even though the Australian Prudential Regulation Authority (APRA) has already set benchmarks for Australian banks to meet Basel III liquidity standards ahead of the global deadline, and APRA is considered one of the world’s tougher prudential regulators.

We should unfortunately expect more volatile times ahead; both for countries within the eurozone and for countries like Australia, where the stock market rises and falls because of concerns about the global economy. We may think down under we are insulated from the euro’s problems – but we are not.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.