IMF salutes Aussie banking laws

Australia’s banking policies helped major lenders survive the global financial crisis, the International Monetary Fund (IMF) says.

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A staff report, to be released on Friday, credits existing banking regulations for keeping banks profitable.

It also calls on the Reserve Bank of Australia (RBA) to leave interest rates on hold, at least for now.

The endorsement of Australia’s lending laws comes only a day after the Senate voted to hold an inquiry into banking competition.

The IMF appears to have slapped down shadow treasurer Joe Hockey’s call for the Australian Prudential Regulation Authority to investigate whether or not the banks are taking unnecessary risks.

In its report, the IMF credits the “four pillars” policy, which prevents the major banks from merging, for limiting risky behaviour before the financial crisis and helping to maintain stability.

The Washington-based organisation has also called on the RBA keep the cash rate at 4.5 per cent.

“Keeping policy rates on hold since May 2010 was appropriate, in light of increased uncertainty about prospects for the recovery,” it said.

“With lending rates in Australia close to 10-year averages and economic activity responding quickly to cash rate adjustments, the RBA has scope to wait for the outlook to become clearer.”

But it noted that rates would eventually have to rise to contain inflationary pressures generated by the mining boom, which has produced elevated coal and iron ore prices.

Private-sector investment in mining and commodity exports were expected to replace public demand as the main driver of growth.

Household consumption, too, was tipped to be strong as a rebounding labour market helped drive income growth.

Australia’s terms of trade – the ratio of export to import prices – was expected to rise to historic highs in late 2010, driving a long-lasting resources boom tied with fast-growing economies in Asia.

But the report noted the terms of trade could fall sharply if Chinese demand for commodities declined.

It also pointed to fiscal instability in Europe which could push up the cost of capital for Australian borrowers.

Treasurer Wayne Swan seized on this prediction to endorse the government’s stimulus spending.

“The IMF also points to the challenges that lie ahead for Australia relating to the patchy global economic recovery, from which we are not immune,” he said in a statement.

The Australian economy is expected to grow by 3.0 per cent in 2010 and 3.5 per cent in 2011.