Finance news

India's central bank raised interest rates for the second time this month and asked lenders to set aside more money as reserves to cool inflation running at a 13- year high.

The repurchase rate was lifted to 8.5 percent from 8 percent, and the cash reserve ratio to 8.75 percent from 8.25 percent, the Reserve Bank of India said in a statement issued in Mumbai today. The increase was the biggest since 2000 and followed a quarter-point rise on June 11.

Governor Yaga Venugopal Reddy is under pressure from the finance ministry to tighten monetary policy after record oil prices drove inflation to 11.05 percent in the week ended June 7. That may further hurt consumer demand and threatens to derail India's record 8.8 percent annual economic growth since 2003, the fastest after China among the world's major economies.

“The latest inflation reading was a shocker because of the nature of the oil prices pass-through,'' said S. Ananthanarayan, chief bond trader at Kotak Mahindra Bank Ltd., a Mumbai-based primary dealer that underwrites government debt sales. “They probably felt all the measures they've taken so far have been inadequate, and now they're playing catch-up.''

The central bank signaled it is prepared to keep raising interest rates if necessary to tame inflation.

Inflation Expectations

“In view of the criticality of anchoring inflation expectation, a continuous heightened vigil over ensuing monetary and macroeconomic developments is warranted to enable swift responses with appropriate measures as necessary, consistent with the monetary policy stance,'' the bank said in the statement.

India's 10-year bond yields climbed yesterday as high as 8.64 percent, the highest since 2001, before declining to 8.56 percent in Mumbai today. The rupee was little changed today at 42.965 per dollar.

Traders expect the rupee to rise from near a 14-month low to reduce the import cost of fuel, food and other products.

Finance Secretary D. Subbarao said on June 21 that monetary policy is the “first line of defense'' as the government tries to rein in prices before elections by May.

“High prices will most definitely result in aggressive monetary tightening, even at the cost of lower growth, making things all the more unenviable for the government,'' said Rohini Malkani, a Mumbai-based economist at Citigroup Inc. “With inflation likely to remain at elevated levels for the rest of the year, political parties have started positioning themselves for the next elections.''

Election Issue

India's inflation rate has almost tripled this year, eroding the popularity of Singh's ruling Congress party, which lost ground in nine of 11 state elections since January 2007 free credit report.com. More than half of India's 1.1 billion people live on less than $2 a day.

Before today, Reddy had raised the repurchase rate eight times in the past 2 1/2 years and increased the cash reserve ratio seven times since December 2006 to slow money supply and cool inflation.

“A tight monetary stance will have to continue for another year to slow inflation to the desired level,'' said Rajiv Kumar, a former policy adviser in the finance ministry between 1992 and 1995 who is now the director of the Indian Council for Research on International Economic Relations. “Growth could come down to as low as 6.5 percent by 2010.''

Soaring Costs

Inflation is accelerating across Asia as crude oil and raw material costs climb, forcing governments from Indonesia to Sri Lanka to cut subsidies and let regulated fuel prices increase.

Singh increased retail prices of gasoline and diesel this month, joining China, Indonesia, Malaysia and Sri Lanka, as a near doubling of oil prices pushed up costs and eroded profits of refiners such as Indian Oil Corp.

“The Manmohan Singh government is squarely responsible for this dismal situation,'' the Communist Party of India (Marxist), the biggest ally of the government, said on June 20. “It cannot escape by blaming global inflation.''

Inflation is “a major political issue,'' said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai, before the rate announcement. “There needs to be significant further tightening to arrest inflationary expectations, second- round effects and demand pressures.''

Strong Enough

China told lenders to set aside more money for a fifth time this year on June 7 to cool inflation that is close to a 12-year high. Banks must put aside a record 17.5 percent of deposits as reserves from June 25.

India has supported monetary policy steps with tax cuts to ease prices. On June 4 the government scrapped taxes on imports of crude oil and reduced duties on other fuel products, foregoing $5.3 billion of revenue to cushion consumers from high fuel costs.

“The RBI is essentially saying the economic fundamentals are looking strong and can bear higher interest rates,'' said Prasanna Ananthasubramaniam, a fixed-income analyst at Mumbai- based primary dealer, ICICI Securities Ltd. “Its main priority and concern is now to cool inflation.''

Source

The index of leading U.S. economic indicators probably rose in March as cash poured into the banking system and the Federal Reserve lowered the benchmark interest rate, economists said before a report today.

The Conference Board's gauge increased 0.1 percent, the first gain in six months, after falling 0.3 percent in February, according to the median forecast in a Bloomberg News survey of 54 economists. The measure points to the direction of the economy over the next three to six months.

The improvement is a tentative signal that the economy, after deteriorating in the first six months of 2008, may not weaken further in the second half of the year. The report would indicate the Fed's rate reductions and efforts to ease the credit crisis may help mitigate the damage from the slump in subprime lending.

“A rise in the money supply should have cushioned the blow from some of the other components of the index,'' said Aaron Smith, an economist at Moody's Economy.com in West Chester, Pennsylvania. The report points toward economic “weakness that is mild in nature.''

The New York-based Conference Board, a private research group, is scheduled to issue the report at 10 a.m. Survey estimates ranged from a decline of 0.3 percent to a 0.4 percent gain.

Also at 10 a.m., the Philadelphia Fed will release its regional manufacturing gauge. Economists surveyed by Bloomberg News project the index will rise to minus 15 from minus 17.4 in March, signaling a slower pace of contraction. A similar report from the New York Fed earlier this week unexpectedly showed a return to growth.

Factory Improvement

The manufacturing components of the leading index probably contributed to the projected gain in March. The factory workweek rose by 6 minutes to 41.3 hours last month, according to Labor Department figures, and the Institute for Supply Management's measure of supplier deliveries also improved.

Seven of the 10 economic indicators that make up the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, supplier delivery times and factory hours.

The Conference Board estimates the remaining three — new orders for consumer goods, bookings for capital equipment and the money supply.

The financial components helped push the leading index higher. The biggest contributor was probably the money supply as investors poured the cash from sales of stocks and securities such as subprime-mortgage instruments into money-market funds creditreport.

Fed Action

As credit markets seized up, the Fed on March 16 gave all primary dealers in U.S. government bonds the same access to loans formerly reserved only for banks. The central bank now auctions as much as $100 billion in funds a month, making it easier to liquidate some hard-to-sell assets.

The yield curve, or the differential between the Fed's benchmark rate and the yield on the Treasury's 10-year note, also widened last month. The central bank dropped its target rate by three-quarters of a point to 2.25 percent on March 18, leading to a steeper curve.

The yield differential turned positive for the first time in February after 19 months of negative readings that subtracted from the leading index. The Fed has cut its benchmark rate by 3 percentage points since September, with two-thirds of reduction coming in the first three months of this year.

A Labor Department report today, due at 8:30 a.m., is projected to show initial jobless claims rose last week to 375,000 from 357,000 the prior week, according to the median estimate in a Bloomberg News survey of economists.

More Firings

Initial jobless claims, consumer expectations about the economy and building permits are among the components projected to detract from the leading index.

Economists surveyed by Bloomberg News earlier this month forecast the economy will not grow at all in the first half of the year. A majority of those polled projected the U.S. is, or will be, in a recession.

The Fed yesterday said economic growth slowed in nine of 12 districts since February, hurt by “anemic'' real estate markets and a slowdown in consumer spending, according to its regional business survey known as the Beige Book.

JPMorgan Chase & Co., the third-biggest U.S. bank, yesterday reported a 50 percent drop in first-quarter profit on $5.1 billion of writedowns and provisions.

Chief Executive Officer Jamie Dimon, said on a conference call with reporters that the credit-market crisis is more than halfway finished as financial firms reduce leverage, and may be as much as 80 percent over.

Source

Australia's benchmark interest rate at a 12-year high is exerting a “significant restraining influence'' on consumers and businesses, central bank board members judged at their April 1 meeting.

Higher borrowing costs, as well as tighter credit standards for more risky borrowers, are working to “foster the moderation in demand growth that was needed to ease the pressure on inflation,'' board members said, according to the minutes released today in Sydney. Slower global economic growth and “tighter financial conditions'' in Australia are also likely to “reduce expansionary forces,'' they said.

Governor Glenn Stevens left rates unchanged two weeks ago for the first time in three months to gauge fallout from a global credit squeeze that has forced central banks around the world to cut borrowing costs. Policy makers raised the benchmark rate to 7.25 percent in March to cool the fastest inflation in 16 years.

“The board has absolutely finished raising rates, and is acknowledging the increases are working to bring down growth and inflation,'' said Joshua Williamson, senior strategist at TD Securities Ltd. in Sydney.

“From reading the minutes, it hard to get a sense of when they will cut rates. They are playing a waiting game,'' he said.

Australia's dollar traded at 92.68 U.S. cents at 12:17 p.m. in Sydney from 92.63 cents before the minutes were released. The yield on the two-year government bond fell 2 basis points, or 0.02 percentage point, to 6.15 percent.

Inflation Pressures

Annual core inflation accelerated to 3.8 percent in the fourth quarter. The government will publish the first-quarter prices report on April 23.

The central bank aims to keep annual price increases between 2 percent and 3 percent on average.

Gains in consumer prices are likely to remain “relatively high'' in the short term, and annual inflation will probably accelerate further in the first quarter, the minutes said.

Board members expect “inflation to decline over time, though they recognized that there are significant risks in both directions,'' the Reserve Bank of Australia said get a free credit report.

The central bank's rate increases, as well as the decision by Australian lenders to boost borrowing costs by more than the Reserve Bank this year, shows signs of slowing economic growth.

“Recent information, including through liaison sources, provided indications that domestic demand was slowing,'' today's minutes said. “Business and consumer sentiment had softened in the early part of 2008, and retail sales had slowed, as had household credit demand.''

Confidence Falters

Reports published since April 1 show home-loan approvals slumped by the most in four years in February, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March as concern about the slowing U.S. economy and the global credit squeeze saw Australia's stock market record its worst first quarter since 1987.

Retail sales fell in January and February as consumers spent less on household goods and at restaurants and bars, figures showed on April 4.

The central bank will lower its forecasts for economic growth and inflation when its quarterly policy statement is released on May 9, Stevens said this month, without providing any figures. “There is at least some evidence that a moderation in demand is occurring,'' Stevens said at his half-yearly testimony before parliament's economics committee in Sydney on April 4. “That, if it continues, should in due course act to slow prices.''

Australia's central bank will lower interest rates by 46 basis points in the next 12 months, according to a Credit Suisse Group index based on trading in interest-rate swaps. The next interest-rate decision is due May 6.

“The current level of rates, as we have made quite clear, is on the high side,'' Stevens said on April 4. “At some point in time, they can be lower.''

Source

French Finance Minister Christine Lagarde said she hoped the warning from the Group of Seven nations against “sharp fluctuations'' in currencies will strengthen the dollar.

“I hope this concerted wording on currencies will help,'' she said in a Bloomberg Television interview in Washington yesterday when asked how worried she was by the dollar's slide.

Finance ministers and central bankers from the G-7 yesterday signaled concern about the dollar's drop by saying that recent movements in exchange rates may hurt the global economy. The dollar has slumped 8 percent against the euro and 6 percent versus the yen since the officials last met in Tokyo in February.

The statement released after talks marks the first “significant change'' in the G-7's currency stance in four years, Lagarde said. “It clearly reflects changes that have occurred in the market since the last meeting,'' she added.

President Nicolas Sarkozy's government recently stepped up complaints that the euro's appreciation against the dollar is pushing France-based companies, including planemaker European Aeronautic, Defence & Space Co., to cut jobs at home and relocate some activities abroad.

`Suffocating' Impact

Paris-based Hermes International SCA, the maker of Kelly and Birkin handbags, is running out of room for price increases to counter declines in the dollar, Chief Executive Officer Patrick Thomas said March 20. EADS CEO Louis Gallois told Le Figaro on March 26 that the euro's record high against the dollar is “suffocating.''

The U.S faxless payday advance. currency reached a record low of $1.5913 against the euro on April 10. “Since our last meeting, there have been at times sharp fluctuations in major currencies, and we are concerned about their possible implications for economic and financial stability,'' the G-7 officials said in their statement.

European Central Bank President Jean-Claude Trichet called for “discipline'' on currency markets and said in Washington that authorities will be monitoring them “closely and collaborate'' if needed.

Still, Italian Finance Minister Tommaso Padoa-Schioppa said his country must adapt to the euro's strength because it may not wane.

“The economy has not completely learned to live with a strong currency,'' Padoa-Schioppa told reporters after yesterday's meetings. The International Monetary Fund this week forecast Italian growth of 0.3 percent this year, the weakest in the G-7.

The G-7 also laid out a 100-day plan to strengthen financial-market regulation amid an eight-month credit squeeze. The initiatives “will actually address some of the confusion, the uncertainty and the lack of confidence that prevails on the markets at the moment,'' Lagarde said.

Source

It's choked with debt, should have been fixed a long time ago, and both leading candidates for Italian prime minister decry its condition.

As April 13-14 elections near, you can't tell whether Silvio Berlusconi and Walter Veltroni are talking about Italy's economy or its national airline, Alitalia SpA.

Italy has become Europe's second-least competitive economy since adopting the euro in 1999. It has the largest debt in Europe — bigger than its annual gross domestic product — and economic growth this year is likely to be the slowest among the 15 nations that share the single currency, according to the European Commission. Meanwhile, both candidates are pledging tax cuts and higher public-works spending, a strategy that may increase the budget deficit.

“Italy and its economy are like the Titanic hitting the iceberg,'' said Gianni De Michelis, deputy prime minister in 1988 and 1989. “It's gotten to this stage after years of negligent governments on both sides. Berlusconi or Veltroni? It makes no difference.''

The national election, called when Prime Minister Romano Prodi's government collapsed Jan. 24 after 20 months in power, comes as the outlook is worsening. The government last month slashed its 2008 growth forecast by more than half to 0.5 percent and predicted that the deficit, now 1.9 percent of gross domestic product, would widen.

Promises

While two-time prime minister Berlusconi, 71, and Veltroni, the 52-year-old former mayor of Rome, both promise to reduce spending so they can cut taxes, neither has made clear what they would trim. The prospect of rising debt fuels the risk to Italy's credit rating, ratings companies say.

Standard & Poor's and Fitch Ratings slashed Italy's creditworthiness in October 2006, less than six months after the last election. S&P also cut the rating in July 2004, during Berlusconi's tenure. Fitch rates Italy's long-term debt AA-, while S&P gives it A+.

“We hope they would reduce expenditure in public administration and, more importantly in the long term, cut pension spending before contemplating tax cuts,'' S&P's credit analyst Trevor Cullinan said in a telephone interview from London. “That doesn't look likely.''

Investors are indicating skepticism as well. The difference in yield between Italy's benchmark 10-year bond and the German bund, Europe's benchmark security, rose to 65 basis points last month. It was the highest spread in more than a decade. A basis point is equivalent to 0.01 percentage point.

Interest

Interest on the national debt is 70 billion euros ($109 billion) a year, about 1,200 euros per Italian http://payday-z.com. Italy is also burdened with a pension system that eats up 15 percent of GDP, the highest in the European Union, according to the Organization for Economic Cooperation and Development.

Prodi's government raised taxes and cut spending to reduce the debt and bring the deficit below the EU limit for the first time since 2002. He had less success finding a domestic solution for state-owned Alitalia, which hasn't earned an operating profit in almost a decade and has had nine government-appointed chief executives in the past 15 years. The carrier owes creditors about twice its current market value and has received two state bailouts in the past six years.

Prodi, 68, chose Air France-KLM Group SA to buy the state's 49.9 percent stake. The March 16 offer valued Alitalia at 10 cents a share, 80 percent less than its market value then. Air France yesterday broke off negotiations, ending the government's 15-month attempt to find a buyer.

`Arrogant and Unacceptable'

Berlusconi denounced the bid in campaign appearances as “arrogant and unacceptable'' and called on Italian entrepreneurs to come forward with an alternative offer “in the name of national pride.'' Veltroni asked that Alitalia stay outside “the electoral meat grinder.''

That's unlikely. Air France dropped its bid after failing to gain union support for the offer, prompting Alitalia Chairman Maurizio Prato to resign. Finance Minister Tommaso Padoa- Schioppa said yesterday that the only alternative to the Air France purchase would be to seek protection from creditors.

While the airline was amassing more than 3 billion euros in losses in the past decade, Italy's overall competitiveness was slipping to 46th in the World Economic Forum's 2007-2008 ranking. It trails behind Latvia, South Africa and Bahrain and, in the euro area, ranks only above Greece.

Prone to Recession

Much of that slide came during Berlusconi's second stint as prime minister between 2001 and 2006, when Italy went through three recessions.

Even with Berlusconi's economic record, he has maintained an advantage over Veltroni in opinion polls that has held at between 6 and 9 percentage points during the campaign.

“Italy is the land that resists change,'' said James Walston, a professor of politics at Rome's American University. “Everyone complains, but in the end no one is willing to undergo the sacrifices necessary: for Alitalia it's the job cuts, for the economy it's the public spending it just can't contain.''

Source