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Storms Probably Impeded U.S. Production, Construction in Temporary Setback

by on March 14, 2010

By Bob Willis March 14 (Bloomberg) — Blizzards on the East Coast and harsh weather in other parts of the U.S. probably impeded manufacturing and construction in February, representing a temporary setback to the recovery, economists said before reports this week. Output at factories, mines and utilities may have been little changed after rising since July, according to the median estimate of 59 economists surveyed by Bloomberg News ahead of a Federal Reserve report March 15. Builders probably broke ground on the fewest houses since October, another report may show. Manufacturers may make up for the disruptions this month as companies strive to stabilize inventories and exports climb, while the outlook for housing is less bright as foreclosures mount. Analysts anticipate Federal Reserve policy makers meeting this week will reiterate a pledge to keep interest rates low as other reports show inflation cooled last month. “The production numbers will be hurt by the snowstorms,” said James O’Sullivan , global chief economist at MF Global Ltd. in New York. “The trend in housing starts is probably not much better than flat, as there is still a huge inventory of unsold homes.” The gains in production from July through January represent the longest stretch of increases since the nine months through January 1998. Leading Recovery Manufacturers, which make up about 12 percent of the economy, will probably continue to lead the recovery as business equipment spending picks up and expanding global economies boost demand from overseas. Investment in equipment and software increased at an 18 percent annual rate in the fourth quarter, the most since 2000, the Commerce Department said Feb. 26. Some companies are upgrading sales forecasts. Deere & Co ., the world’s largest maker of farm machinery, posted first-quarter profit that topped analysts’ estimates and raised its 2010 forecast as projections improved for agricultural-equipment sales in the U.S. and Canada. Chief Executive Officer Samuel Allen said Feb. 17 that full-year equipment revenue will increase as much as 8 percent. Industrywide, farm machinery sales in the U.S. and Canada are expected to be about the same as last year, an improvement from a November projection of a 10 percent decline in the region. The Standard & Poor’s Supercomposite Machinery Index , which includes companies such as Deere, has increased 8.9 percent so far this year, outperforming the broader S&P 500 Index, which climbed 3.1 percent. Storms’ Influence Nonetheless, the manufacturing rebound may have paused last month as factories grappled with the storms that pushed seasonal snowfall counts to records in parts of the eastern U.S. Weekly hours worked by factory production workers fell to 40.3 in February from 40.7 in January, the biggest decline since December 2008, according to the Labor Department’s employment report March 5 that showed job losses slowed last month. Chrysler Group LLC, the U.S. automaker run by Fiat SpA, said it suspended production for part of the third week of February at assembly plants in Michigan and Illinois because of parts shortages, said Jodi Tinson , a Chrysler spokeswoman, on Feb. 16. She confirmed the stoppage at the Warren, Michigan, pickup-truck factory was related to inclement weather. “We don’t expect any loss of production,” Tinson said. “We’ll find ways to make it up as we go.” Regional Gauges Two other reports from the Fed this week will probably show manufacturing production expanded in March. The Fed Bank of New York’s factory index , due tomorrow, will probably show growth continued in March for an eighth month, according to economists’ estimates. The Fed Bank of Philadelphia ’s survey, due three days later, may show a seventh month of expansion. The market that triggered the worst recession in seven decades continues to struggle. Housing starts probably fell to a 570,000 annual pace, a 3.6 percent decline from January, according to the median forecast of economists surveyed by Bloomberg. Building permits , a sign of future construction, probably fell 3.4 percent to a 601,000 pace, economists forecast the Commerce Department will report March 16. Consumer prices probably rose 0.1 percent in February, compared with a 0.2 percent gain the prior month, according to economists’ forecasts before the Labor Department’s March 18 report. A report the previous day may show wholesale prices fell 0.2 percent in February, economists forecast. Fed Meeting The lack of inflation validates the Fed’s strategy to maintain the benchmark lending rate on overnight loans between banks near zero to spur growth. Their decision on interest rates is due March 16. The rate will stay in a range of zero to 0.25 percent through October before going up by a quarter point in each of the last two meetings of the year, according to the median forecast of economists surveyed earlier this month. Finally, the Conference Board’s index of leading economic indicators, due out on March 18, may show a 0.1 percent gain in February after increasing 0.3 percent the prior month, according to the median forecast of economists surveyed by Bloomberg. It would mark the 11th consecutive advance. To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net .

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Storms Probably Impeded U.S. Production, Construction in Temporary Setback

Australia Employment Rises Less-Than-Estimated; Jobless Rate Gains to 5.3%

by on March 10, 2010

By Jacob Greber March 11 (Bloomberg) — Australian employers added fewer workers in February than economists forecast, giving central bank Governor Glenn Stevens scope to slow the pace of future interest-rate increases. The number of people employed rose 400 from January, the smallest gain in six months, the statistics bureau said in Sydney today. The median estimate of 25 economists surveyed by Bloomberg was for an increase of 15,000. The jobless rate rose to 5.3 percent from a revised 5.2 percent. Weaker employment growth may prompt consumers to trim spending in coming months. Governor Stevens last week raised borrowing costs by a quarter point to 4 percent for the fourth time in five meetings, and signaled further moves as the nation’s economic growth accelerates. “We’ve had almost 200,000 new jobs created over the previous five months, so there was always going to be a pullback at some time,” Adam Carr , a senior economist at ICAP Australia Ltd. in Sydney, who forecast employers would cut 15,000 jobs last month, said ahead of today’s decision. “Leading indicators are suggesting solid jobs growth” this year rather than an acceleration, he added. The number of full-time jobs gained 11,400 in February and part-time employment decreased 11,000, today’s report showed. Cadbury, Boeing Cadbury Plc, the U.K.-based confectioner, said last month it will fire 60 workers in Australia when it closes its Melbourne warehouse this year. Boeing Co. said last week it will shut its plant in Sydney in 2012 and consolidate its Australian aerospace manufacturing in Melbourne. The move may see 350 jobs lost in Sydney with 300 positions offered in Melbourne, the company said on March 4. Investors are betting there is a 26 percent chance of a quarter-point increase in the overnight cash rate target to 4.25 on April 6, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 8:56 a.m. The chance of a 25 basis point move by the end of next quarter stands at 100 percent. Stevens is the first Group of 20 central banker to raise borrowing costs in 2010 after leading the world in boosting benchmark rates three times last quarter amid mounting evidence Australia’s economy will strengthen after skirting the global recession in 2009. The moves have taken the Reserve Bank’s overnight cash rate target to 4 percent from a half-century low of 3 percent at the start of October. Inflation Threat “Australia starts the current expansion with considerably less spare capacity than earlier thought likely, and with less than at the starting point of previous expansions,” central bank Assistant Governor Philip Lowe said yesterday. “We will need to keep a strong focus on improving the supply side of the economy so that demand can grow solidly without putting upward pressure on inflation,” he said. Gross domestic product rose last quarter at the fastest pace in almost two years, climbing 0.9 percent from the three months through September as companies increased investment. Growth is also being stoked by Prime Minister Kevin Rudd ’s decision to spend A$22 billion ($20 billion) on roads, railways and schools. GDP is forecast by the central bank to climb 3.25 percent in the three months through December 2010 from a year earlier, after gaining an annual 2 percent in the fourth quarter of 2009. Business investment is currently equivalent to around 16 percent of GDP, which is “not far below its peak level in the past four decades and is expected to rise a little further over the next couple of years,” Lowe said yesterday in Sydney. Job Advertisements Australian advertisements for job vacancies jumped 19.1 percent in February, the most in a decade, while consumer and business confidence advanced, reports showed this week. Increased spending on projects such as the Chevron Corp.- led A$43 billion Gorgon gas venture in Western Australia is worsening a skills shortage. Construction on the project began this year and will generate up to 10,000 jobs. Marius Kloppers , chief executive officer of BHP Billiton Ltd., the world’s biggest mining company, said on Feb. 10 that the skills shortage in Australia’s resources industry is emerging faster than expected. More than A$100 billion of resources projects in Western Australia are likely to generate about 40,000 construction jobs and 12,500 permanent positions, a state government report released last year shows. Population Growth Prior to today’s release, government reports showed Australian employers added 194,600 jobs in the five months through January, the biggest increase in more than three years. The nation’s unemployment rate has held below 5.9 percent since July 2003. “Employment is growing strongly, more than keeping pace with the fastest migration-fueled growth in population in decades,” Kieran Davies , chief economist at RBS Group Australia Ltd. in Sydney, said ahead of today’s report. In contrast, the unemployment rate in the U.S. was 9.7 percent in February, and 9.9 percent in January among European Union countries. Australia’s participation rate, which measures the labor force as a percentage of the population aged over 15, fell to 65.2 percent in January from 65.3 percent, today’s report showed. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Australia Employment Rises Less-Than-Estimated; Jobless Rate Gains to 5.3%

Canada Keeps Benchmark Rate at 0.25%, Says Inflation Rate Above Forecast

March 2, 2010

By Greg Quinn March 2 (Bloomberg) — The Bank of Canada kept its benchmark interest rate at a record low today, and said that inflation and economic output have been higher than policy makers expected. The target rate for overnight loans between commercial banks remained at 0.25 percent, where it’s been since April, as predicted by all 22 economists surveyed by Bloomberg. The bank also repeated a pledge to leave it unchanged through June unless the “current” inflation outlook shifts. The economy grew at a 5 percent pace in the fourth quarter, Statistics Canada said yesterday, faster than the bank’s Jan. 21 prediction of 3.3 percent. Inflation has also accelerated close to the central bank’s 2 percent target. “Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity,” the Ottawa-based bank said in a statement. Fourth quarter growth came from “vigorous domestic spending and further recovery in exports.” The bank said the expansion, which was the fastest in almost a decade, pushed Canada’s output to a level “slightly higher than the Bank had projected.” Governor Mark Carney has said there must be a transition towards private expenditures instead of government stimulus to create a sustained recovery. The bank’s statement dropped a reference made in January to inflation risks being “tilted slightly to the downside.” The statement also omitted a reference to the central bank having “flexibility” even with the key interest rate close to zero. Sending a Message “It doesn’t take huge changes in words to send a message,” said Doug Porter , deputy chief economist with BMO Capital Markets in Toronto before the announcement. “They have to slowly but surely set the landscape for rate hikes.” Canada’s annual inflation rate was 1.9 percent in January, the fastest pace in more than a year, Statistics Canada said Feb. 18. The so-called core inflation rate , which excludes gasoline and seven other volatile items, rose 2 percent, underscoring what Carney has called “stickiness” in that rate. Carney has also said Canada’s economy will operate with “slack” through the middle of 2011. Growth will be curbed by the Canadian dollar’s strength and a low volume of U.S. orders, the bank reiterated today. Canada’s dollar appreciated 25 percent against the U.S. dollar over the past 12 months to about 96.6 U.S. cents. “It’s better to move sooner than later but be less aggressive,” said Yanick Desnoyers , assistant chief economist at National Bank Financial in Montreal. He predicts an April rate increase. Spare Capacity Statistics Canada also revised its earlier growth figures to show the country’s first recession since 1992 was deeper than thought, with a 7 percent annualized contraction in the first quarter of last year. The capacity left in the economy means the bank can wait until after its June commitment ends to raise rates by a quarter point, Porter said. “It would take an awful lot to push the bank into an earlier move,” he said. The bank should raise its key lending rate in half-point moves after June, University of Western Ontario professor Michael Parkin said in a Feb. 23 paper. Taking the rate to 3.75 percent by mid-2011 is needed to keep inflation in check as an economic recovery is “taking hold,” Parkin wrote for the C.D. Howe Institute, a research group chaired by former Bank of Canada Governor David Dodge . The Bank of Canada will probably raise the key rate to 0.75 percent in the third quarter and to 1.25 percent by the end of the year, according to the median forecast of economists surveyed by Bloomberg News. A separate survey for the U.S. shows economists don’t expect the Federal Reserve to raise its benchmark rate to 0.75 percent until the fourth quarter. To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net .

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Fed Discount-Rate Increase Signals Retreat From Emergency Monetary Easing

February 18, 2010

By Craig Torres and Vivien Lou Chen Feb. 19 (Bloomberg) — The Federal Reserve Board sent its most explicit signal yet that the emergency supply of liquidity to financial markets is done and the most aggressive monetary policy easing in its 96-year history will eventually reverse. Chairman Ben S. Bernanke and his colleagues at the Board of Governors raised the rate charged to banks for direct loans by a quarter-point to 0.75 percent, effective today. It was the first increase in the discount rate since June 2006. The Fed portrayed the decision as a “normalization” of lending that would have no impact on monetary policy, repeating in a statement in Washington yesterday that its benchmark federal funds rate would stay low for an “extended period.” The assurances didn’t stop investors from increasing bets that the Fed would tighten policy in the fourth quarter. The dollar rose and U.S. stock futures fell after the announcement. “The discount rate historically has always been used as a psychological tool for signaling the future course of monetary policy,” said Sung Won Sohn , former chief economist at Wells Fargo & Co. and now an economics professor at California State University-Channel Islands in Camarillo, California. “The bottom line is the Fed is signaling that in the future rates are more likely to go up, rather than stay stable or go down.” U.S. central bankers closed four emergency lending facilities this month and are preparing to reverse or neutralize the more than $1 trillion in excess bank reserves they have pumped into the banking system. The discount-rate increase will encourage banks to borrow in private markets rather than from the Fed, the statement said. ‘Time of Uncertainty’ “There is no way of doing this in times of uncertainty and not cause some reaction in financial markets,” said David Montero-Rosen , chief investment officer at the Graham & Dodd Fund LLC in New York. The dollar rose to $1.3485 per euro as of 1:06 p.m. in Tokyo from $1.3527 late yesterday in New York, after climbing to $1.3444, the strongest since May 18. Futures on the Standard & Poor’s 500 Index expiring in March lost 1.1 percent to 1,093.50. Bernanke prepared investors for the move in Feb. 10 testimony to Congress, saying the discount rate would have to be raised “before long.” In the minutes of the January 26-27 Federal Open Market Committee meeting released Feb. 17, policy makers said an increase “would soon be appropriate.” Even so, the increase came sooner than many analysts and investors expected. ‘Big Surprise’ “The big surprise was the timing,” said Alan Ruskin , head of currency strategy at RBS Securities Inc. in Stamford, Connecticut. “This is just one more very, very clear signal that the abnormal liquidity provisions provided during the crisis are being withdrawn.” Fed Bank of St. Louis President James Bullard yesterday said expectations for an interest-rate increase were exaggerated. “The idea that’s in markets that there’s a high probability that we’ll raise rates later this year is overblown,” Bullard said in response to audience questions after a speech in Memphis, Tennessee. “There’s also some probability, maybe more, that this will extend into 2011.” Larry Meyer , a former Fed governor and vice chairman of Macroeconomic Advisers LLC in Washington, said yesterday’s decision “says absolutely nothing” about the timing of the first increase in the federal funds rate. “We believe that the Fed will not raise the funds rate for the first time until the middle of 2011,” Meyer said in a Bloomberg Television interview. Rate Near Zero The Fed has kept the benchmark rate for overnight borrowing between banks to a range of zero to 0.25 percent since December 2008 and repeated after last month’s policy meeting that the rate would stay low for an “extended period.” Fed officials have nevertheless been warning financial institutions to be prepared for higher rates and are keeping a close watch on leverage, market valuations and overall financial conditions. In January, the Fed Board issued an advisory with other regulators urging banks to strengthen their management of interest-rate risk. Yesterday’s announcement was “basically a psychological message to the marketplace that at some point the Fed does have to begin to pay attention to the potential of inflation down the road,” Kelly King , chairman and chief executive of BB&T Corp., said in an interview with Bloomberg Television. “I don’t think they are going to be moving short-term rates anytime in the very near future.” Regional Fed Banks King is a member of the Richmond Fed’s board of directors, which, like the 11 other regional Fed boards, has the authority to request changes in the discount rate. Those requests are subject to final review and determination by the Board of Governors. The Board said yesterday it approved requests for the rate increase from all 12 regional Fed banks. Lenders have borrowed less from the Fed’s district banks as the crisis ebbed and the economy returned to growth. Financial institutions have reduced their reliance on the Fed window. Banks had borrowed $14.1 billion as of Feb. 17, representing less than 1 percent of the central bank’s $2.28 trillion in total assets. A year ago, borrowing stood at $65.1 billion. The Fed continues to add reserves to the banking system with its purchases of $1.43 trillion in housing debt, which are scheduled to end next month. Bernanke used the discount rate as his first policy tool to attack the financial crisis. Before August 2007, the discount rate was set at one percentage point above the federal funds rate. As subprime mortgage defaults began to ripple through the financial system in August 2007, the Fed reduced the spread to half a percentage point and lengthened the term to 30 days from overnight. Bear Stearns Following the rescue of Bear Stearns Cos. in March 2008, the Fed again lowered the spread to a quarter point and extended the term to 90 days. The term was later reduced to 28 days. Yesterday, the Fed board said that effective March 18, the maturity on discount- window loans will be shortened to overnight. The changes are “not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy,” yesterday’s statement said. Fed officials reinforced the message in speeches that were previously scheduled for last night. Atlanta Fed President Dennis Lockhart told a Georgia business audience that policy “remains accommodative.” Fed Governor Elizabeth Duke , speaking in Norfolk, Virginia, said the steps “do not signal any change in the outlook for monetary policy.” To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net ; Vivien Lou Chen in Memphis at vchen1@bloomberg.net

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Video: Meyer Expects Fed to Raise Funds Rate in Middle of 2011: Video

February 18, 2010

Feb. 18 (Bloomberg) — Former Federal Reserve Governor Laurence Meyer, now vice chairman of Macroeconomic Advisers LLC, talks with Bloomberg’s Peter Cook about the Fed’s decision to raise its discount rate by a quarter point to 0.75 percent and the oulook for monetary policy. They also discuss the central bank’s strategy to sell assets and its role as a regulator. (Source: Bloomberg)

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Australia’s Stevens Sees Less Room for Economic Growth Without Inflation

February 18, 2010

By Jacob Greber Feb. 19 (Bloomberg) — Australia’s economy has less scope than previously expected for “robust” growth that doesn’t stoke inflation , central bank Governor Glenn Stevens said. “Monetary policy must therefore be careful not to overstay a very expansionary setting,” Stevens told lawmakers at a parliamentary committee hearing in Canberra today. Policy makers said this week their decision to unexpectedly keep interest rates unchanged on Feb. 2 was “finely balanced” amid concern that European sovereign-debt risks may weaken the global economic recovery. Stevens said today borrowing costs in Australia are still between 50 and 100 basis points below what the central bank considers “normal.” “Stevens is quite bullish on domestic growth, but whether that translates into a March hike is another matter,” said Adam Carr , an economist at ICAP Australia Ltd. in Sydney. “I don’t know what more they need to see to hike again — it should already be very clear cut.” The Australian dollar traded at 89.25 U.S. cents at 9:56 a.m. in Sydney from 89.38 cents before the governor’s testimony began. The yield on two-year government bonds rose six basis points, or 0.06 percentage point, to 4.31 percent from 4.25 yesterday. A basis point is 0.01 percentage point. Stevens was the first central banker in the world to raise borrowing costs three times last year, taking the overnight cash rate target to 3.75 percent in December from 3 percent at the start of October. ‘Further Adjustments’ “If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent” with the bank’s target range of 2 percent to 3 percent, Stevens said. Inflation expectations are “reasonably well anchored” and a stronger currency will continue to help in containing price gains over the coming year, the governor said. Stevens’s testimony today came after the Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent, another step in the U.S. central bank’s gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed left the benchmark overnight lending rate in a range of zero to 0.25 percent at its meeting on Jan. 27. Below Normal Traders are betting there is a 38 percent chance of a quarter-percentage-point rate increase when the Reserve Bank of Australia next meets on March 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 10:02 a.m. Prior to today’s testimony, chances of a move stood at 40 percent. “We’re still below normal, I would say, which hitherto has been the appropriate place to be,” Stevens said. “There’s a little distance to go before you could characterize interest rates as normal.” Stevens said unemployment has peaked at less than 6 percent, “much lower than we or most others forecast.” Australia is experiencing its biggest jobs boom in five years. Employers added 194,600 workers in the five months through January, cutting the unemployment rate to an 11-month low of 5.3 percent, almost half European Union and U.S. levels. The jobs surge should help spur the economy, one of the few to skirt last year’s global recession after Prime Minister Kevin Rudd distributed more than A$20 billion ($18 billion) in cash to households and began spending another A$22 billion on roads, railways and schools. Australia’s gross domestic product will probably expand by “a bit over” 3 percent in 2010 and about 3.5 percent in the following two years, Stevens said. “Now we must turn our attention to the challenges of managing an economic expansion,” he said. “Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage.” To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Australia’s Stevens Sees Less Room for Economic Growth Without Inflation

February 18, 2010

By Jacob Greber Feb. 19 (Bloomberg) — Australia’s economy has less scope than previously expected for “robust” growth that doesn’t stoke inflation , central bank Governor Glenn Stevens said. “Monetary policy must therefore be careful not to overstay a very expansionary setting,” Stevens told lawmakers at a parliamentary committee hearing in Canberra today. Policy makers said this week their decision to unexpectedly keep interest rates unchanged on Feb. 2 was “finely balanced” amid concern that European sovereign-debt risks may weaken the global economic recovery. Stevens said today borrowing costs in Australia are still between 50 and 100 basis points below what the central bank considers “normal.” “Stevens is quite bullish on domestic growth, but whether that translates into a March hike is another matter,” said Adam Carr , an economist at ICAP Australia Ltd. in Sydney. “I don’t know what more they need to see to hike again — it should already be very clear cut.” The Australian dollar traded at 89.25 U.S. cents at 9:56 a.m. in Sydney from 89.38 cents before the governor’s testimony began. The yield on two-year government bonds rose six basis points, or 0.06 percentage point, to 4.31 percent from 4.25 yesterday. A basis point is 0.01 percentage point. Stevens was the first central banker in the world to raise borrowing costs three times last year, taking the overnight cash rate target to 3.75 percent in December from 3 percent at the start of October. ‘Further Adjustments’ “If economic conditions evolve roughly as we expect, further adjustments to monetary policy will probably be needed over time to ensure that inflation remains consistent” with the bank’s target range of 2 percent to 3 percent, Stevens said. Inflation expectations are “reasonably well anchored” and a stronger currency will continue to help in containing price gains over the coming year, the governor said. Stevens’s testimony today came after the Federal Reserve Board raised the discount rate charged to banks for direct loans by a quarter point to 0.75 percent, another step in the U.S. central bank’s gradual retreat from its unprecedented actions to halt the deepest financial crisis since the Great Depression. The Fed left the benchmark overnight lending rate in a range of zero to 0.25 percent at its meeting on Jan. 27. Below Normal Traders are betting there is a 38 percent chance of a quarter-percentage-point rate increase when the Reserve Bank of Australia next meets on March 2, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 10:02 a.m. Prior to today’s testimony, chances of a move stood at 40 percent. “We’re still below normal, I would say, which hitherto has been the appropriate place to be,” Stevens said. “There’s a little distance to go before you could characterize interest rates as normal.” Stevens said unemployment has peaked at less than 6 percent, “much lower than we or most others forecast.” Australia is experiencing its biggest jobs boom in five years. Employers added 194,600 workers in the five months through January, cutting the unemployment rate to an 11-month low of 5.3 percent, almost half European Union and U.S. levels. The jobs surge should help spur the economy, one of the few to skirt last year’s global recession after Prime Minister Kevin Rudd distributed more than A$20 billion ($18 billion) in cash to households and began spending another A$22 billion on roads, railways and schools. Australia’s gross domestic product will probably expand by “a bit over” 3 percent in 2010 and about 3.5 percent in the following two years, Stevens said. “Now we must turn our attention to the challenges of managing an economic expansion,” he said. “Issues of capacity, productivity, flexibility, adaptation to structural change and so on will once again come to centre stage.” To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Fed Officials Debated Reducing Balance Sheet at Last Meeting, Minutes Show

February 17, 2010

By Scott Lanman and Craig Torres Feb. 17 (Bloomberg) — The Federal Reserve said its top officials last month debated how and when to shrink the central bank’s $2.26 trillion balance sheet, with some policy makers pushing to start selling assets in the “near future.” Officials unanimously agreed that Fed assets and banks’ excess cash will need to shrink “substantially over time” and return the central bank’s holdings to just Treasuries, the Fed said in minutes of the Jan. 26-27 Federal Open Market Committee meeting, released today in Washington. Policy makers also considered changing the statement to refer to “holdings” of mortgage-backed securities instead of “purchases.” The report shows differences over how to exit the Fed’s record credit expansion that Fed Chairman Ben S. Bernanke left out of Feb. 10 congressional testimony. Bernanke said he didn’t expect any asset sales in the “near term,” and that any such sales in the future would be at a “gradual pace” and reflect the Fed’s assessment of the economy. “Most judged that a future program of gradual asset sales could be helpful” to shrink the balance sheet, while some officials were concerned about disrupting financial markets and the economy, the minutes said. “Several thought it important to begin a program of asset sales in the near future,” including spreading sales “over a number of years,” according to the report. Stocks Rise The Standard & Poor’s 500 Index climbed 0.4 percent to 1,099.51 at 4:10 p.m. in New York. The yield on the 2-year Treasury note rose five basis points to 0.85 percent, and the 10-year yield increased eight basis points to 3.73 percent. “The Fed is trying to figure out its task in a more normal operating environment,” said Paul Ballew , chief economist at Nationwide Mutual Insurance Co. in Columbus, Ohio. “That includes reducing their balance sheet and moving back toward more traditional securities.” The minutes said all Fed officials agreed that raising the interest on excess reserves rate and the target for the federal funds rate “would be a key element” in a move toward tighter policy. Most officials thought it would be appropriate to begin draining reserves before raising the rates, the minutes said. A majority of officials also “saw benefits” in continuing to use the federal funds rate as a target for policy in the long run, “so long as other money market rates remained closely linked” to the target. First Time In the statement issued Jan. 27, the Fed declared for the first time the U.S. economy is in “recovery” while reaffirming it would end liquidity backstops and a $1.25 trillion program to buy mortgage-backed securities. Bernanke said last week the U.S. still requires a “highly accommodative” Fed policy, reiterating that low rates are warranted for an “extended period.” The minutes gave more information on Kansas City Fed President Thomas Hoenig ’s vote against the “extended period” language in the statement. Hoenig proposed the FOMC “express an expectation that the federal funds rate would be low for some time” and said he wanted the Fed to set a “modestly higher” rate soon, the minutes said. At the meeting, Fed staff officials proposed widening the spread between the discount rate and federal funds rate initially to a half percentage point from a quarter point, the minutes said. Discount Rate While policy makers “agreed that it would soon be appropriate” to raise the discount rate and shorten the term of discount window loans to overnight, the limit before the financial crisis, some officials said the “optimal spread could depend, in part,” on Fed decisions about longer-term policy, the report said. Bernanke, 56, who won a 70-30 Senate vote last month for a second four-year term, laid more groundwork on Feb. 10 for exiting his record expansion of credit without saying when he’ll take the first step. In congressional testimony, Bernanke described how the Fed might use tools such as interest it pays on banks’ deposits to tighten credit “at some point.” He also said a potential increase in the Fed’s discount rate would be part of the “normalization” of lending “before long,” and wouldn’t signal a change in the outlook for monetary policy. Economic Forecasts Policy makers at their meeting last month also raised the low end of their forecasts for economic growth and the unemployment rate , the Fed said. The U.S. economy will expand by a range of 2.8 percent to 3.5 percent this year, compared with a median projection of 2.5 percent to 3.5 percent in November, when officials last gave forecasts. The unemployment rate will average 9.5 percent to 9.7 percent in the fourth quarter, compared with the forecasts of 9.3 percent to 9.7 percent from November, the central bank said. The jobless rate fell to 9.7 percent last month from 10 percent in December, close to a 26-year high. Officials predicted prices, excluding food and energy costs, will rise by 1.1 percent to 1.7 percent this year, after previous projections of 1 percent to 1.5 percent. At the previous meeting, which took place Dec. 15-16, Fed officials discussed whether the economy was strong enough to allow their asset purchases to end in March and differed over the risk of inflation. A few policy makers said it “might become desirable at some point” to boost or extend securities purchases aimed at lowering mortgage rates , while one person sought a reduction, according to minutes of the December session. On inflation, some officials said slack in the economy will damp prices, and others saw risks from the central bank’s “extraordinary” stimulus. To contact the reporters on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Craig Torres in Washington at ctorres3@bloomberg.net .

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Russia Cuts Benchmark Rate to Record Low to Spur Lending, Stem Ruble Bets

December 25, 2009

By Alex Nicholson and Paul Abelsky Dec. 25 (Bloomberg) — Russia’s central bank cut its benchmark interest rate for the 10th time since April to discourage speculative ruble trades and ease credit flows. Bank Rossii cut the refinancing rate by a quarter point to a record low 8.75 percent effective Dec. 28, it said in a statement today. The bank last lowered the rates by half a percentage point on Nov. 24. The central bank has cut the refinancing rate from 13 percent in April after the world’s biggest energy exporter lurched into its deepest economic decline on record, contracting 10.9 percent in the second quarter and 8.9 percent in the third. The bank has eased policy to aid the recovery and stem speculative inflows that has fueled ruble volatility. There’s some evidence the Moscow-based bank’s currency policy is working. The ruble has lost 2.7 percent against the dollar since Nov. 11, when it reached the strongest level of the year, after gaining 13 percent in the previous three months. Bank Rossii’s efforts to deter speculation are “appropriate,” International Monetary Fund senior Russia representative Odd Per Brekk said last month. Russian authorities are trying to discourage the use of the ruble in so-called carry trades, in which investors borrow in low-yielding currencies to buy high-yielding currencies that can generate a quick profit. Capital Flows Russian equity funds drew $59.5 million in the seven days ended Dec. 16 after posting an inflow of $181.7 million a week earlier, according to EPFR Global. The country may post a net capital outflow in the fourth quarter after oil prices retreated in December and investors fled emerging-market assets on concerns about Dubai’s debt restructuring, central bank Chairman Sergey Ignatiev said on Dec. 22. Russia may see a net outflow of $40 billion for the year, according to the central bank. Policy makers are also trying to revive lending after previous rate cuts failed to ease credit flows. The financial industry will show “zero growth” next year as provisions for mounting bad loans tie up cash that might have gone to companies and households, Alexander Turbanov , head of the Deposit Insurance Agency, said last week. “We could not drastically change the situation with lending in industry,” Deputy Economy Minister Andrei Klepach said last month. “There is stagnation in lending and borrowing.” Lending Signs Policy makers will be looking for signs that today’s cut feeds through to bank loans. Lending to companies by Russian banks rose 0.8 percent last month, Bank Rossii First Deputy Chairman Gennady Melikyan said last week. Lending to households fell 0.2 percent in the month, while bank assets grew 2.8 percent, Melikyan said, adding that the data don’t include OAO Sberbank, the country’s biggest lender, or take exchange-rate shifts into account. “Banks are not lending at present, and have effectively frozen their corporate loan books,” said Clemens Grafe , chief economist at UBS AG in Moscow. “Instead, they are concentrating on building up buffers to absorb expected loan losses, and this is clearly restricting the economy.” Russian banks’ corporate loan books fell 0.5 percent in October, following a 0.7 percent decline the previous month, the central bank said on Dec. 3. Growth Outlook Corporate borrowing costs from domestic banks fell in November to the lowest level this year, sliding to an average of 13.6 percent compared with 13.9 percent a month earlier and 17.4 percent in January, the central bank said on Dec. 23. The country will post “steady economic growth” next year because the negative factors that led to the worst slump since the 1998 default, including lower prices for commodities and a lack of external financing, are “no longer in effect,” Ignatiev said this week. The economy may grow 5 percent or more in 2010, faster than the government is estimating, and output will return to its pre- crisis level in less than three years, Ignatiev said Dec. 22. The refinancing rate may be lowered as much as 1 percentage point in 2010, Arkady Dvorkovich , President Dmitry Medvedev’s chief economic adviser, said Dec. 8, adding that the inflation rate next year may slow to 8 percent or more. “Average lending rates may drop more,” Dvorkovich said. “Lending rates for large and medium companies are at 14 percent to 16 percent. I think they may drop by 3 percentage points.” Russia has continued easing its policy rates even as the IMF has urged Bank Rossii to halt the reductions, warning they may be inflationary. “Further cuts in policy interest rates should be put on hold until the monetary implications of the very large end-year liquidity injection associated with the fiscal deficit become clear,” the IMF said in a report this month. The IMF warned Bank Rossii to step up efforts to contain inflation and embrace a more “ambitious” policy to reduce consumer-price growth to below 5 percent in 2010. Consumer prices rose 9.1 percent on an annual basis in November, the slowest pace in more than two years, according to the Federal Statistics Service. To contact the reporters on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net . Paul Abelsky in Moscow at pabelsky@bloomberg.net ;

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India’s 7.9% Economic Growth May Force Subbarao to `Sit Up, Take Notice’

November 30, 2009

By Cherian Thomas and Kartik Goyal Dec. 1 (Bloomberg) — India’s central bank may withdraw more stimulus measures by the end of the year after Asia’s third-biggest economy grew at the fastest pace in six quarters. “The chances of a rate move before the end of December have risen,” said Robert Prior-Wandesforde , senior Asia economist at HSBC Holdings Plc in Singapore. Economic growth of 7.9 percent last quarter was an “extraordinary” number that “will no doubt make the Reserve Bank of India sit up and take notice,” he said. Governor Duvvuri Subbarao , concerned about inflation gaining traction, last week indicated that there was a need to exit some of the “unconventional” measures used to spur growth. Australia and Vietnam have already begun to tighten monetary policy as the Asia Pacific region leads the world out of the worst recession since the 1930s. India’s $1.2 trillion economy may grow about 7 percent in the year to March 31, Finance Minister Pranab Mukherjee said in New Delhi yesterday after the statistics bureau released gross domestic product figures for the quarter ended Sept 30. Last quarter’s growth beat the estimates of all 22 economists in a Bloomberg survey. Subbarao in October predicted growth this fiscal year of 6 percent “with an upward bias.” The benchmark Sensitive index gained 1.8 percent to 16,926.22 yesterday after the GDP report and the rupee increased 0.3 percent to 46.5157 against the dollar. The yield on the benchmark 10-year government bond rose 7 basis points to 7.26 percent. Australia, Vietnam Australia’s central bank may increase its benchmark interest rate by a quarter point today for a record third straight month as evidence mounts that the nation’s economy is strengthening, economists said. Vietnam raised its key rate by one percentage point to 8 percent last week to curb inflation. Growth in India is benefiting from record-low interest rates, tax cuts and higher government spending unveiled by policy makers since September 2008 to shield the economy from the global slump. The combined stimulus is worth more than 12 percent of GDP. While Subbarao started to withdraw monetary stimulus in October by ordering lenders to keep aside a greater proportion of deposits in government bonds, he has kept the benchmark reverse repurchase rate unchanged at 3.25 percent since April. Inflation pressures are building as growth quickens and after the weakest monsoon rains since 1972 hurt farm output, pushing up food costs. The central bank forecasts inflation of 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September. ‘Corrective’ Steps Macquarie Group Ltd. economist Rajeev Malik expects Subbarao to raise the cash reserve ratio, or the proportion of deposits lenders keep with the central bank as cash reserves, as early as this month before increasing interest rates. Mukherjee said last month he will take “corrective” steps and pull back fiscal stimulus once economic recovery takes hold. That stage may not have been reached, as the central bank deputy governor Subir Gokarn yesterday said the unexpected increase in India’s economic growth may be on account of the government stimulus and that its “premature” to say the economy can grow 7 percent in the current financial year. Montek Singh Ahluwalia , deputy chairman of India’s Planning Commission, the government’s economic advisory arm, said the growth numbers suggest that policies are working and that there is no need to change them at present. Inflation is not a “big problem” at the moment, he said yesterday. Withdrawing Liquidity “We are still about two quarters away from rate hikes per se but the central bank might start withdrawing liquidity through an increase in its regulatory reserve requirements,” said Gaurav Kapur , an economist at ABN Amro Bank in Mumbai. “While there is some improvement in private consumption, investment activity still remains a laggard.” Companies including JSW Steel Ltd. , India’s third-largest producer, said it is “not very clear” whether the economy would expand at the same pace in the current quarter. Growth in the construction and real estate business has been subdued since October, JSW’s Chief Financial Officer Seshagiri Rao said yesterday. Still, the economic expansion in India is the fastest after China among the world’s biggest economies, attracting investments from French tire maker Michelin & Cie and South Korea’s Samsung Electronics Co. China’s economy grew 8.9 percent last quarter. Michelin said this month it plans to invest 40 billion rupees ($860 million) in a new factory in the southern Indian state of Tamil Nadu. Samsung on Nov. 17 inaugurated an air- conditioner manufacturing unit in India, its fifth such facility in the world. “The pace of recovery is stronger than expected,” said Chetan Ahya , regional economist at Morgan Stanley in Singapore. “We maintain our view that the central bank will lift policy rates by 25 basis points in January, 2010.” To contact the reporter on this story: Cherian Thomas in New Delhi at Cthomas1@bloomberg.net .

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Australia’s RBA Says Pace of Rate Gains Is `Open’ Question; Currency Drops

November 16, 2009

By Jacob Greber Nov. 17 (Bloomberg) — Australia’s central bank says the pace of interest-rate increases is an “open question” as it balances the risk of keeping borrowing costs too low against an economy that may cool as government stimulus abates. “In considering the pace of that adjustment, members were conscious of balancing risks,” officials said in minutes released today of their Nov. 3 meeting, at which they became the first central bank to raise borrowing costs twice this year. The currency fell as traders pared bets on whether Governor Glenn Stevens will raise the benchmark rate on Dec. 1 by a quarter percentage point for a record third month. Business and consumer confidence, which helped Australia skirt the global recession, “could prove fragile,” and growth may slow as the effects of cash handouts to households and Prime Minister Kevin Rudd’s infrastructure spending fades. “There’s a very a real chance they will pause until March before further tightening,” said Stephen Roberts , a senior economist at Nomura Australia Ltd. in Sydney. “The minutes highlight that this rate hiking process was always going to have periods where they take time out to assess where they’re going.” Investors are betting there is a 60 percent chance Stevens will increase the key rate by another quarter point in two weeks to 3.75 percent, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 1:20 p.m. That would be the first time in history the bank has raised borrowing costs at three successive meetings. Prior to today’s minutes, there was a 72 percent chance of an increase. Policy makers aren’t scheduled to hold a meeting in January. Currency Falls The Australian dollar fell to 93.41 U.S. cents at 1:22 p.m. in Sydney from 93.76 cents before the minutes were released. The two-year government bond yield dropped 6 basis points, or 0.06 percentage point, to 4.52 percent. The evolving economic will call for further “gradual” increases in borrowing costs, though “the pace of the adjustment remained an open question,” today’s minutes said. “Business and consumer confidence could prove fragile, and economic activity at home and abroad might slow more than expected as the effects of stimulus measures faded.” The rising Australian currency will also “constrain output and dampen inflationary pressure,” while credit conditions for some borrowers “remained quite difficult,” the bank said. “On the other hand, a lengthy period with interest rates at a very low level carried its own risk,” policy makers said. Global Rates Governor Stevens raised the overnight cash rate target by a quarter point in October and this month, from a half-century low of 3 percent. By contrast, the U.S. Federal Reserve and Bank of Japan have kept borrowing costs at close to zero, while the European Central Bank and Bank of England have held rates at record lows. Fed Chairman Ben S. Bernanke said yesterday that economic “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of a U.S. economic recovery, warranting continued low borrowing costs. “It’s very much a case of the Reserve Bank versus the Fed,” said Adam Carr , a senior economist at ICAP Australia Ltd. in Sydney. “There are two modes of thought — we’re going to have a good recovery or we’re going to have a sluggish recovery. We do not have enough data to determine who is right.” Rate Differential Speculation that Stevens will continue to raise borrowing costs as Bernanke keeps his rate unchanged have driven a 33 percent gain in Australia’s currency this year, pushing it toward parity with the U.S. dollar. Still, there are signs that a recovery in Australia’s economy, which was stoked in the first half of this year by more than A$20 billion ($19 billion) in government cash handouts to households, may cool in the fourth quarter. Consumer confidence fell this month for the first time since May and retail sales unexpectedly dropped in September. Liaison with shopkeepers “pointed to retailers experiencing mixed conditions in September and October, although the broader perspective was that spending appeared to have held up reasonably well given that the earlier boost from the payments to households was fading,” today’s minutes said. Also, “members noted the weak outlook for construction of apartments, in contrast to the current strong population growth.” Inflation Target Underlying inflation and gains in the annual consumer price index were expected “to be consistent” with the central bank’s target range of between 2 percent and 3 percent, the minutes said. The central bank this month predicted the nation’s economy will expand at more than three times the pace it forecast in August. Gross domestic product will rise 1.75 percent this year and 3.25 percent in 2010, the bank said on Nov. 6. Three months earlier, it forecast gains of 0.5 percent and 2.25 percent respectively. The economy will continue its expansion in 2011 and 2012 as companies boost investment in resources, including Western Australia’s A$43 billion Gorgon liquefied natural gas project owned by Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell Plc, the bank predicted earlier this month. To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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Russia’s Central Bank May Cut Key Rate Half Point This Year, Survey Shows

November 10, 2009

By Paul Abelsky Nov. 10 (Bloomberg) — Russia’s central bank will probably cut its key interest rate a further half a point this year to a record low as the regulator tries to goad banks to lend more and to stem ruble gains that threaten an export recovery. Bank Rossii , which has reduced rates eight times in the past six months, may lower the refinancing rate a quarter point to 9.25 percent this month, according to the median estimate of nine economists surveyed by Bloomberg. The rate may fall to 9 percent by the end of the year, the survey showed. The bank, which doesn’t publish a timetable for rate meetings, began relaxing policy on April 24 for the first time since 2007. “We still have some room for additional easing of our policy rate,” Bank Rossii First Deputy Chairman Alexei Ulyukayev said in an interview last week. Last month, he said the refinancing rate may be lower than 9 percent next year. The bank last month cut the rate half a point in part to reduce the “attractiveness of short-term investments” and “stop the accumulation of risk” in the world’s biggest energy exporter. Prime Minister Vladimir Putin has said he won’t allow the ruble to strengthen excessively as exporters, reeling from a lack of credit, struggle to tap into a global trade recovery. Previous rate cuts have failed to ease lending, stalling business investment and hiring. The ruble was unchanged versus the dollar at 10:45 a.m. in Moscow at 28.7362 and little changed against the euro at 43.0504. Lenders’ corporate loan books shrank 0.7 percent in September from August, while lending to consumers fell 1.1 percent in the same period, the central bank said on Nov. 2. The ratio of non-performing loans climbed in the period to 6.4 percent from 6.2 percent, according to central bank data. Economic Backdrop Bank Rossii has lowered the rate from 13 percent in April after the economy contracted at a record pace, culminating in a 10.9 percent slump in the second quarter. Russia’s worst recession since the 1998 default and falling wages have eased consumer-price growth to the slowest in more than two years. The annual inflation rate fell to 9.7 percent in October, the Federal Statistics Service said on Nov. 3. That compares with 14.2 percent a year earlier, and an average inflation rate of more than 14 percent in the decade through 2008. “ Inflation is likely to be single-digit in 2009 and the central bank may cut rates again this year by another 50 basis points,” Aleksandra Evtifyeva and Dmitri Fedotkin , economists at VTB Capital in Moscow, said in a report. Consumer-price growth will be “a little more” than 8 percent this year, Putin said on Oct. 25, the slowest annual average pace on record. That marks a reversal for Russia, which is haunted by inflation rates in excess of 100 percent after its 1998 default and more than 1,000 percent after it abandoned central planning for market prices in the early 1990s. Steering Currency Bank Rossii on Oct. 29 said it will use rates to steer the currency, marking the first explicit warning it will use tools beyond currency transactions to stem capital flows that threaten an economic recovery. The bank bought more than $11 billion of currency last month, Ulyukayev said on Oct. 23. The nation’s currency reserves, the world’s third-biggest stockpile, rose to $432.8 billion as of Oct. 30, the highest this year. An 80 percent rebound in the price of Urals crude, Russia’s main export blend, since the start of the year is helping a recovery as the government taps into the windfall revenue to finance its budget gap, the first in a decade, and keep stimulus measures in place. Rising prices for commodities have also boosted the ruble to the highest level this year. The currency strengthened 3.5 percent against the dollar in October, the second consecutive monthly gain. ‘Fluctuations’ The ruble may trade around 36 against its target dollar- euro basket by the end of November and weaken to 38 by the end of the year, according to the median estimate in the survey. “For now, at least, the prospects for the ruble are inherently tied to fluctuations in the oil price, Neil Shearing , emerging markets economist at Capital Economics in London, said in a report. “The best of the ruble rally has probably passed. While commodity prices may hover around their current levels for the next three months or so, we expect them to fall back over the course of next year as the pace of global recovery starts to fade.” A weaker currency would lead the central bank to reverse its rate cuts and tighten liquidity, Shearing said. Policy makers, including President Dmitry Medvedev , have pledged to wean the economy off its commodity reliance and steer Russia toward more sustainable expansion. The central bank wants to shift its policy focus to an inflation target by 2011. The government expects the economy to contract 6.8 percent in the second half and 8.5 percent in 2009. Output will return to growth of 1.6 percent next year and 3 percent in 2011, the government estimates. To contact the reporter on this story: Paul Abelsky in Moscow at pabelsky@bloomberg.net .

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Bollard Says New Zealand Rates on Hold Until Late 2010; Currency Declines

October 28, 2009

By Tracy Withers Oct. 29 (Bloomberg) — New Zealand’s central bank said it will wait until the second half next year before raising interest rates because the economy needs further stimulus as it recovers from a recession. “We see no urgency to begin withdrawing monetary policy stimulus and we expect to keep the cash rate at the current level until the second half of 2010,” Reserve Bank Governor Alan Bollard said in a statement in Wellington today after leaving the official cash rate at a record-low of 2.5 percent. Rising house prices and a pickup in consumer and business confidence have fanned expectations Bollard may raise borrowing costs as early as the first quarter to remove some stimulus from the economy and counter emerging inflation pressures. The nation’s currency has surged and traders are betting the cash rate could be at least 4.5 percent in a year. “The Reserve Bank needs to lean gently against further house-price rises sooner rather than later,” Annette Beacher , senior strategist at TD Securities in Singapore, said ahead of today’s decision. “The bank will quickly run out of headroom on inflation once the economy gains more traction.” New Zealand’s dollar fell to 72.36 U.S. cents at 9:05 a.m. in Wellington from 72.81 cents immediately before the decision. The currency has gained 27 percent in the past six months. All 11 economists surveyed by Bloomberg News expected today’s decision. Three, including Beacher, forecast a rate increase in the first quarter of next year and nine expect higher borrowing costs by June 30. Fiscal Stimulus Bollard’s outlook on rates has changed only slightly since Sept. 10 when he said he expected to keep the cash rate “at or below the current level through until the latter part of 2010.” The economy grew for the first time in six quarters in the three months to June buoyed by low interest rates and a fiscal stimulus that included tax cuts and extra government spending. “The forecast recovery in economic activity is based on fiscal and monetary policy continuing to provide substantial support to the economy,” said Bollard. “We think such support remains appropriate.” Finance Minister Bill English has signaled he will start to reduce government spending. Removing some of the current fiscal stimulus is likely to reduce the work that monetary policy will otherwise need to do, Bollard said. Central bankers around the world are now assessing when to start raising interest rates as the global economy recovers. Australia, Norway Reserve Bank of Australia Governor Glenn Stevens raised his benchmark rate on Oct. 6 by a quarter point to 3.25 percent, the first G-20 central banker to move since the height of the financial crisis. Norway’s central bank yesterday raised its overnight deposit rate to 1.5 percent. While the economies of New Zealand’s main trading partners are rebounding, there remains “significant vulnerabilities and challenges to be worked through,” Bollard said. In New Zealand, trader expectations of a rate increase in the coming year surged after an Oct. 15 report showed inflation accelerated faster in the third quarter than Bollard expected, and that core inflation hasn’t slowed amid the worst recession in three decades. Traders saw no chance of an increase today, according to an index compiled by Credit Suisse based on swaps trading in Wellington yesterday. House Prices “Inflation is expected to track comfortably within the target range over the medium term,” Bollard said. The central bank is required to keep annual price rises between 1 percent and 3 percent. House prices have increased 7.9 percent since a low in January and property sales in September surged 44 percent from a year earlier, according to Real Estate Institute figures. A stronger housing market helped drive consumer confidence to a four-year high in the third quarter, according to an index complied by Westpac Banking Corp. and McDermott Miller Ltd. “A very gradual increase in household spending appears to be taking place,” said Bollard. “Government spending is also supporting activity. Business spending, however, remains weak and credit growth is very subdued.” Signs of a global recovery and rising commodity prices kept business confidence near a 10-year high in October, according to an ANZ National Bank Ltd. survey published yesterday. To be sure, the currency’s gains may slow the recovery by curbing exports and tourism, which make up 40 percent of the economy. Spending by foreign tourists in New Zealand fell in the 12 months through March 31, the first drop in a decade, a report showed yesterday. “The high level of the New Zealand dollar has limited the scope for exports to contribute to the recovery, and reinforces a bias towards domestic expenditure,” said Bollard. “After some short-term correction, it is also likely to see the current account deficit begin to widen in the medium term.” To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net .

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Norway Lifts Key Rate to 1.5%, Becoming First in Europe to Reverse Easing

October 28, 2009

By Josiane Kremer Oct. 28 (Bloomberg) — Norges Bank raised its key interest rate a quarter point from a record low and signaled steeper increases than it previously forecast over the next three years as inflation accelerates and unemployment remains low. The Oslo-based bank raised the overnight deposit rate to 1.5 percent, becoming the first European central bank to reverse its easing cycle since the credit crisis started to abate. Nineteen of 20 economists surveyed by Bloomberg had predicted the move, while one had expected a half-point increase. “It appears that unemployment over the next few years will remain lower and wage growth somewhat higher than previously projected,” the bank said in a statement. “This suggests higher inflation, indicating that the key policy rate should be raised somewhat more rapidly than previously projected.” The key rate will average 4.25 percent in 2012, compared with a June forecast for 3.75 percent, the bank said. The world’s fifth-biggest oil exporter came out of recession in the second quarter after investment in its petroleum industry, a stimulus package equivalent to 4.7 percent of gross domestic product and record-low borrowing costs fueled domestic demand. Prime Minister Jens Stoltenberg , whose coalition government was re-elected last month, has pledged to raise next year’s spending in excess of national fiscal guidelines even after recovery took hold. Economic Outlook The krone was trading 0.2 percent lower against the euro at 8.3781 at 2:50 p.m. in Oslo after having lost as much as 1.1 percent earlier in the day. “Norway’s huge oil surplus and supportive fiscal policy have helped to insulate the economy from the worst of the global economic downturn,” Ben May , an economist at Capital Economics in London, said in a note. “Accordingly, it is unlikely that other central banks in the region will follow suit and hike rates any time soon. What’s more, we doubt that today’s hike will mark the start of an aggressive tightening of monetary policy in Norway itself.” The bank expects underlying inflation, which adjusts for energy and taxes, to average 2.75 percent this year and 1.75 percent in 2010. The mainland economy will shrink 1.25 percent this year and grow 2.75 percent in 2010, it estimates. The key rate will average 1.75 percent this year and 2.25 percent in 2010, rising to an average 4.25 percent by 2012, the bank said. Not Aggressive “This is by no means an aggressive path,” said Harald Magnus Andreassen , chief economist at First Securities ASA in Oslo. “Norges Bank looks to take quite a long time to come back to normal rates.” A “natural” key interest rate level is 5 percent, Governor Svein Gjedrem said on Sept. 25. The benchmark was last at that level in October last year. Gjedrem “has to take into account that fiscal policy is very loose,” said Torgeir Hoien , a former Norges Bank external board member who manages the equivalent of 2 billion kroner ($350 million) in bonds at Skagen AS. Fiscal stimulus has helped keep Norway’s jobless rate the lowest in Europe, with registered unemployment falling to 2.7 percent in September. Survey unemployment was 3.2 percent in the August quarter, Statistics Norway said today. Benefits Households were quick to benefit from monetary easing earlier this year, with about 90 percent of mortgage holders using floating rates, according to the Finance Ministry. That’s boosted demand, with retail sales rising in the last three months for which data are available. Cheap loans and low unemployment have helped push the housing market up in the last three quarters, with prices now matching their peak from the summer of 2007, the Finance Ministry estimates. “The strong boost to households’ disposable income and relatively low unemployment rates have had significant effects on the housing market, home prices have topped the pre-crisis peak levels,” Bjoern-Roger Wilhelmsen, senior economist at First Securities in Oslo and a former Norges Bank economist, said in a note to clients yesterday. While signs of a strong recovery may support a rapid reversal of monetary easing, the central bank must balance the needs of the domestic economy against the prospect of hurting exporters by spurring gains in the krone, economists have said. ‘Overshooting’ “If they don’t do anything about it, you will have an overshooting of the inflation target,” Hoien said. “If they adjust monetary policy to the fact that fiscal policy is very loose, you will get a stronger krone.” The krone has gained 7 percent against the euro since the end of June, making it the second-best performer of the 16 major currencies tracked by Bloomberg in the period. A further strengthening would hurt exporters including Norsk Hydro ASA, Europe’s third-largest aluminum producer, and Norske Skogindustrier ASA, the world’s second-biggest newsprint maker. Exports will recover more slowly than consumer demand, the government forecasts, rising 0.1 percent in 2010 after slumping 6.5 percent this year. The bank uses policy to target consumer price gains of 2.5 percent. Inflation was 2.4 percent last month, adjusting for the effect of taxes and energy. This year, the rate has exceeded the central bank’s target in six out of nine months. “Since the last monetary policy meeting in September, economic data, on average, were stronger than market expectations,” Gizem Kara, an economist at BNP Paribas in London, said in an Oct. 9 note after the inflation report. Gjedrem said on Sept. 30 that asset prices “have risen sharply and probably excessively,” characterizing policy rates as “extremely low. Gjedrem is the third central bank chief to raise rates this year after the Bank of Israel lifted its lending rate a quarter point in August and Australia’s Reserve Bank raised its overnight cash target rate by 0.25 point this month. To contact the reporter on this story: Josiane Kremer in Oslo at Jkremer4@bloomberg.net .

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Australia Inflation Cools to Slowest in Decade, Easing Interest Rate Talk

October 27, 2009

By Jacob Greber and Victoria Batchelor Oct. 28 (Bloomberg) — Australian inflation cooled to the slowest pace in 10 years, easing pressure on central bank Governor Glenn Stevens to increase the benchmark lending rate by a half point next week. The consumer price index rose in the third quarter by an annual 1.3 percent, the smallest gain since the second quarter of 1999, after advancing 1.5 percent in the previous three months, the Bureau of Statistics said in Sydney today. Prices gained 1 percent from the second quarter. Australia’s dollar fell as the report prompted traders to trim bets on the size of interest-rate increases. The Reserve Bank of Australia, the first Group of 20 central bank to raise borrowing costs since the height of the global financial crisis, said keeping borrowing costs too low may threaten its goal of maintaining inflation between 2 percent and 3 percent on average. “Anyone worrying about inflation in the near term is barking up the wrong tree,” said Prasad Patkar , who helps manage about $1.3 billion at Platypus Asset Management in Sydney. Still, “today’s report probably won’t alter the Reserve Bank’s stance on gradually withdrawing monetary stimulus from ‘emergency’ levels.” The Australian dollar, the best performer among the 16 major currencies, fell to 91.06 U.S. cents at 2:09 p.m. in Sydney from 91.80 just before the report, paring its gain over the past 12 months to 42 percent. The two-year government bond yield dropped 8 basis points to 4.85 percent. A basis is 0.01 percentage point. Bank Minutes The currency’s gain will “likely” act as a “contractionary influence on activity and help contain inflation,” central bank policy makers said last week. Investors are certain Governor Stevens will increase the key rate by a quarter point on Nov. 3, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange. There is also a 10 percent chance of a half-point increase, the futures showed at 1:46 p.m., down from 16 percent prior to the report. Food prices fell 0.8 percent and health costs slipped 1 percent in the third quarter, today’s report showed. By contrast, electricity costs rose 11.4 percent and gasoline advanced 4 percent. The median estimate of economists surveyed by Bloomberg News was for annual inflation of 1.2 percent. Core Measures The Reserve Bank’s core inflation measures, which exclude the largest price increases and declines, were also published today. The weighted-median gauge of inflation advanced 0.8 percent in the third quarter for an annual increase of 3.8 percent. Economists forecast gains of 0.8 percent and 3.7 percent respectively. “The Reserve Bank is on a path back to neutral but there’s nothing in the data that suggests they have to ramp up their rhetoric or their tightening,” said Annette Beacher , senior strategist at TD Securities in Singapore. Signs are mounting that Australia’s economy, one of the few including China and India to skirt a recession in the first half of this year, will strengthen in coming months. Reports published since Sept. 30 show consumer confidence jumped this month to the highest level in more than two years, business sentiment held last month near a six-year high, retail sales rose in August, and house prices climbed 7.9 percent this year through August. Skilled Vacancies An index of skilled vacancies in Australia rose 1.9 percent in October from September, a report today showed. Gross domestic product expanded 1 percent in the first half of this year as consumers increased spending, spurred by the central bank slashing borrowing costs by a record 4.25 percentage points between September last year and April, plus A$42 billion ($39 billion) in government stimulus spending. Governor Stevens expects GDP growth to accelerate close to its “trend” pace of 3 percent next year. Australia’s experience of the global recession has been “much milder than elsewhere,” Assistant Governor Malcolm Edey said in Sydney today. “Australia came into the most intense phase of the crisis period in better shape than most, and with more scope than most to make timely macroeconomic policy responses.” The economy’s rebound from the worst global recession since the Great Depression was a key reason central bank policy makers raised the benchmark interest rate to 3.25 percent from a 49- year low of 3 percent on Oct. 6. Keeping the rate at “very low levels” may be “imprudent,” the bank said in minutes of its October meeting, published last week. “While the current forecasts suggested inflation would fall in the coming year, the expected trough in inflation was significantly higher than earlier thought,” the bank said on Oct. 20. “By 2011 inflation could be rising again.” To contact the reporters for this story: Jacob Greber in Sydney at jgreber@bloomberg.net Victoria Batchelor at vbatchelor@bloomberg.net

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