As spiking fuel and food prices rattle markets and consumers worldwide, the U.S. government on Tuesday formed an interagency task force to assess developments in oil and other commodity markets.
The task force is comprised of staff from the Commodity Futures Trading Commission, the Federal Reserve, the Securities and Exchange Commission, and the departments of Treasury, Energy and Agriculture.
It will examine oil supply and demand factors, investor practices and the role of new players in the markets, such as speculators and index traders, according to a CFTC release.
With gasoline prices exceeding $4 a gallon, government policymakers and members of Congress are straining to find solutions.
"High commodity prices are posing a significant strain on U.S. households, and the [new] interagency task force will aid public and regulatory understanding of the forces that are affecting the functioning of these markets," the CFTC said in the release.
On Capitol Hill Tuesday, Senate Democrats pushed for the government to take some of the billions of dollars in profits being captured by the five biggest U.S no qualifying payday advance. oil companies. But the move was blocked by Republicans, who also thwarted a Democratic proposal to give the government greater power to address oil market speculation that some argue has amplified the surge in crude prices.
The CFTC, which regulates U.S. futures markets, began a wide-ranging investigation in December of U.S. oil markets, with a focus on possible price manipulation. The agency is investigating potential abuses in the way crude-oil is purchased, shipped, stored and traded nationwide. It also recently announced several other initiatives designed to enhance the transparency of U.S. and international energy futures markets.
The Bank of Canada unexpectedly kept its benchmark interest rate unchanged on concerns energy costs may push inflation past the top of its target band later this year.
Governor Mark Carney and his five deputies held the rate on overnight loans between banks at 3 percent, surprising all 30 economists surveyed by Bloomberg. Carney also surprised half the economists in a March poll by Bloomberg when he cut borrowing costs by half a point cut instead of 25 basis points.
The Canadian dollar jumped as the central bank paused for the first time since December, after earlier cuts to shore up an economy battered by a high currency and weak U.S. demand for exports such as cars and lumber. Now, with food and energy prices surging, Carney has followed the U.S. and U.K., halting his easing cycle to ensure inflation remains contained.
“The Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 percent inflation target,'' policy makers said today in a statement from Ottawa.
The Canadian dollar strengthened 0.3 percent to C$1.0206 per U.S. dollar at 9:16 a.m. in Toronto, from C$1.0233 yesterday. The currency earlier fell to C$1.0323, the weakest since April 1.
Inflation Risks
The bank sets interest rates to keep inflation between 1 percent and 3 percent, with an optimal target of 2 percent.
Canadian consumers are already seeing higher prices. Inflation unexpectedly accelerated for the first time in five months in April, to a 1.7 percent year-over-year pace. Fuel costs surged 37 percent, and prices for bakery products rose 10 percent, the most since November 1981.
Inflation risks have “shifted slightly to the upside'' since the bank's April forecast, and commodity prices have been “sharply higher than expected,'' the central bank said today.
Still, inflation in Canada has been tempered by competition among grocery-store chains and a strong currency that's made imported goods cheaper no fax payday loans. Inflation is 3.9 percent in the U.S. and 3.6 percent in Italy.
The Bank of Canada's forecast today that inflation could exceed 3 percent this year compares with its April forecast that it would stay under 2 percent until 2010. After the last rate cut of half a point on April 22, the central bank said further action was “likely'' needed because of slow inflation and an export slump.
Strong Dollar
Manufacturers are being squeezed by the high Canadian dollar and declining shipments to the U.S., where economic problems have hurt consumer demand for Canadian goods. Manufacturing payrolls have dropped by about 220,000 workers in three years and companies have shut plants in a bid to remain competitive.
The Canadian dollar hit a record 90.58 Canadian cents per U.S. dollar on Nov. 7. The stronger currency has made Canadian goods more expensive in foreign markets such as the U.S., where Canada sends about 75 percent of its exports.
The Bank of Canada said in April that falling exports will cause the economy to grow 1.4 percent this year, the slowest since 1992. The economy shrank at a 0.3 percent pace between January and March, the first contraction in almost five years. The central bank had forecast an expansion.
Growth Forecast
Policy makers said today they still expect economic growth to pick up this year and next.
U.S. Federal Reserve Chairman Ben S. Bernanke indicated last week that he's ready to pause after cutting the Fed's key rate to 2 percent from 5.25 percent since September. At the Bank of England, Governor Mervyn King kept rates unchanged June 5 after predicting last month that inflation will exceed the government's upper limit. Meanwhile, European Central Bank President Jean-Claude Trichet said last week that he may raise rates next month.
Several top banking regulators warned lawmakers Thursday of more troubles ahead for the industry, including additional writedowns and the possibility that bigger banks could fail.
Speaking before the Senate Banking Committee, officials said most U.S. banking institutions are in relatively good health but remain challenged by continued woes in the housing market and the broader economy.
"We clearly are not out of the woods," said John Dugan, who heads the Office of the Comptroller of the Currency, which oversees banks with a nationwide footprint.
One shortcoming, argued Federal Reserve Vice Chairman Donald Kohn, is that banks have not allocated enough money to keep up with the growth of their problem assets. As a result, they may have to boost their skyrocketing loan loss reserves even further.
Banks insured by the Federal Deposit Insurance Corporation set aside $37.1 billion in loan-loss provisions in the first quarter of this year - four times more than the $9.2 billion in the first quarter of 2007, the FDIC reported last week in its quarterly review of the industry.
Regulators added that they were bracing for an uptick in the number of bank failures, at least in the near term.
So far this year, just four banks have collapsed, including the most recent downfall of the Staples, Minn.-based First Integrity Bank, which shuttered its doors last Friday.
While most of the failures have so far been smaller community banks, FDIC Chairwoman Sheila Bair said her staff was preparing for the possibility of a large failure as a precaution.
"I don’t see that happening," she said cheap payday loans. "But we have to be prepared for all contingencies."
Kohn and Dugan added that many institutions will require additional capital injections in the months ahead and may have to go so far as to cut their dividends.
In early March, many of these regulators met with lawmakers to discuss the state of the banking industry. But the dramatic collapse of Bear Stearns and the Federal Reserve’s controversial rescue of the Wall Street firm since then have raised new fears about the industry.
Now, rumors are swirling about the health of other large financial institutions, most notably Lehman Brothers (LEH, Fortune 500). During the hearing, Sen. Richard Shelby R-AL., asked about the likelihood of another investment bank needing to be bailed out.
Kohn declined to comment on the health of specific companies but said that Wall Street firms have learned a great deal from Bear Stearns and have reduced leverage and built up their liquidity.
"I think we have a stronger set of investment banks than we had a month-and-a-half ago," said Kohn.
New Zealand's central bank Governor Alan Bollard said he may cut interest rates from a record this year, triggering the biggest slump in the currency in five months.
“Our forecast is consistent with the possibility of a rate cut in the third quarter,'' Bollard said in an interview from Wellington today after he kept the official cash rate unchanged at 8.25 percent. “We may see markets decide on a softer New Zealand dollar.''
Bollard, who kept borrowing costs unchanged since July, stalling domestic demand, says the economy contracted in the first three months of this year and he can't rule out a recession. Retail sales and employment fell in the first quarter and house sales slumped in April to a 16-year low.
“There is little doubt in our mind that current monetary policy has been too tight,'' said Shamubeel Eaqub, an economist at Goldman Sachs JBWere Ltd. in Auckland. “The underlying economy is slowing sharply and a hard landing in 2008 is almost a sure thing.''
New Zealand's dollar fell 2.1 percent to 76.63 U.S. cents at 3:25 p.m. in Wellington from 78.28 cents in late Asian trading yesterday.
“That's not a terribly big slump,'' said Bollard. “If we were to see it coming off a lot quicker, that's the sort of thing that would hurt inflation.''
Bollard will leave rates unchanged at his next review on July 24 and cut borrowing costs in September, according to 13 of 15 economists surveyed by Bloomberg News after today's monetary policy statement. Two expect the first cut in October.
Economy Contracted
The economy contracted 0.3 percent in the first quarter and will expand just 0.2 percent in the three months ending June 30, the central bank said in forecasts released today.
Growth will slow to 0.9 percent in the year ending March 31, 2009, from 3.1 percent a year earlier, it said. That's the weakest growth since 1998.
“We aren't forecasting recession, but we are forecasting very flat growth, said Bollard, adding that he can't rule out that the economy may contract for two straight quarters.
Bollard, who is required by the government to keep inflation between 1 percent and 3 percent, said prices will accelerate in the near term because of rising fuel and food costs.
Consumer prices are projected to rise 4.7 percent in the year ending Sept. 30 from 3.4 percent in the 12 months through March. Annual inflation will average 4.1 percent in the first half of 2009 before slowing to 2.9 percent a year later, the central bank forecasts http://paydayintime.com. Previously, the bank expected inflation would be below 3 percent by mid-2009.
Food, Fuel
Inflation is being fanned by rising fuel and food prices Gasoline has jumped 28 percent the past year to a record NZ$1.97 a liter ($5.81 a gallon). Groceries have risen 11 percent.
Also spurring spending, Finance Minister Michael Cullen last month announced NZ$10.6 billion ($8.3 billion) of income-tax cuts over four years from October.
“Government spending and personal tax cuts will add to medium-term inflation pressure,'' Bollard said in today's statement. Still the fiscal stimulus from the budget “was relatively small in the context of other factors affecting the economy.''
Inflation will slow “based on the expectation that commodity prices stop rising, inflation expectations remain anchored and weakening economic activity contributes to an easing in non-tradable inflation,'' he said.
The central bank said the economy shrank 0.3 percent in the first quarter as domestic demand slowed. First-quarter retail spending fell 1.2 percent, the biggest drop in 11 years, and employment declined the most since 1989.
Factories Close
Economic growth will average 1.6 percent in the three years to March 2011, the central bank forecasts. Household spending growth will be flat and employment will decline for the next three years, it said.
Companies are closing factories. Dunedin-based PPCS Ltd., the nation's biggest meat processor, said last month it will shut two abattoirs and fire 604 workers. Fisher & Paykel Appliances Ltd. said in April it was closing a dishwasher manufacturing plant, with the loss of 430 jobs.
The central bank said capacity constraints in the economy will ease, relieving pressure on inflation. The risk is that domestic spending is weaker than forecast as falling property values and rising costs curb disposable incomes, it said.
The Reserve Bank of Australia this week kept its benchmark rate at a 12-year high of 7.25 percent, citing the outlook for inflation. The European Central Bank will probably keep rates unchanged later today, according to the median of 31 forecasts in a Bloomberg News survey.
Slovakia's economic growth remained the fastest among the 21 European countries that have released first quarter data, driven by consumer spending, which threatens to push up inflation.
The annual growth rate was 8.7 percent, matching a preliminary result released on May 15, the Slovak Statistical Office in the capital of Bratislava said today. The rate compares to 14.3 percent in the fourth quarter, when a stockpiling of cigarettes added 4.4 percentage points to the rate, according to the statistics office.
Slovakia is benefiting from increased output from newly built factories by carmakers such as Kia Motors Corp., electronics makers including Sony Corp. and their suppliers. The new jobs and higher wages spurred household spending, which raises concern that inflation may accelerate.
“Domestic demand, fueled by rising wages, is taking over from exports as the main driver of growth,'' said Maria Valachyova, an economist at Slovenska Sporitelna AS. “This has boosted inflation risks.''
Consumption Soars
Household consumption rose an annual rate 8.4 percent in the first quarter, the highest in seven years, compared with a 6.9 percent increase in the previous quarter. Real wages gained 6.2 percent, the most in 10 quarters, and 2.8 percent more people had jobs, the office said.
Slovakia, set to adopt the euro from next year, convinced the European Union that inflation will remain low to meet terms for the currency switch cash till payday.
The inflation rate rose to a 18-month high of 4.3 percent in April, driven by global increase in food and fuel prices, leading policy makers to delay a cut in its 4.25 percent benchmark interest rate needed to align borrowing costs with the euro region's 4 percent.
With the currency switch slated for January, today's release won't prompt a monetary policy reaction, according to Valachyova at Slovenska Sporitelna.
The koruna was trading unchanged at 30.353 against the euro at 9:44 a.m. in Bratislava. It has gained almost 11 percent this year on optimism the koruna will be switched to the euro at a strong rate as the government wants to use the currency strength to tame inflation.
Exports increased 12.2 percent from the first quarter of 2007, while imports were up 12.9 percent. Investment increased 2.4 percent and government spending was up 0.6 percent in year.
Full-year growth will probably reach 7.9 percent, compared with 10.4 percent last year, the statistical office estimated. It put year-end inflation at 4.1 percent.
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