Oil prices jump $2 after US leads air strikes on Libya

Oil prices have climbed after a series of air strikes were carried out by allied forces against Libya.

Brent crude rose $2.26 to $116.19 a barrel, while US light crude rose $2.13 to $103.20, before slipping slightly.

Libya is the world’s twelfth-largest oil producer. There are concerns about the extent of the damage the conflict may do to its facilities.

Oil prices have been volatile as markets have dealt with a number of issues including the Japan earthquake.

Fear factor

Amrita Sen, an analyst at Barclays Capital, said there was concern about further escalation of the situation in Libya now that the extent of military involvement was clearer.

“The damage to infrastructure might be larger, keeping Libya out of the oil market for longer,” she said.

Since the start of the unrest in Libya, Saudi Arabia and other OPEC nations have assured that they are willing to increase their output and replace any loss in Libyan supplies.

These assurances helped calm markets a bit, but the air strikes on Libya over the weekend have once again stoked fears.

Analysts say that uncertainty about the future is driving market sentiment.

“I can see uncertainty and fear driving the price of oil higher in the short term,” said Matthew Lewis of CMC Markets.

Mr Lewis also added that as long as a permanent solution to the Libya unrest was not achieved, oil price will remain volatile.

“At this stage, it looks like Libya has further to play. Gaddafi still seems very defiant,” he said.

“We’ll see further spikes and shocks in the oil market this week,”

‘Risk premium’

The uprising in Libya is not the only concern that has got the markets worried about oil supply and prices.

The recent unrest in Bahrain is playing a major role as well.

“Even though Bahrain is not a major oil producer, its location if geographically critical,” said Ong Yi Ling of Philip Futures.

Thera are concerns that the crisis in Bahrain could spread to other oil-producing nations in the Middle East affecting oil supplies.

Ms Ling said this uncertainty is being factored in by the markets.

“There is a Middle-East risk premium attached to the oil price,” she said.

She warned that if the crisis did spread to other other oil producing nations, price could spike even further.

http://www.bbc.co.uk/news/business-12802108

India Predicts Fastest Economic Growth Since 2008

By Kartik Goyal – Feb 7, 2011 1:40 PM GMT+0100

Subbarao, who has raised rates the most among Asian central banks in the past year, last month urged the government to cut subsidies including that on oil, saying “monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control.” Photographer: Adeel Halim/Bloomberg

India’s government predicted the economy will expand the most in three years, supporting the central bank’s case for raising interest rates further after the steepest increases in Asia.

The $1.3 trillion economy will probably expand 8.6 percent in the year ending March 31 from a year earlier, the Central Statistical Organisation said in a statement in New Delhi today. The projection was in line with the median of 16 estimates in a Bloomberg News survey.

India, battling inflation stoked by rising consumer demand and food costs, is bracing for the impact of a possible spurt in oil prices following political unrest in Egypt, central bank Deputy Governor Subir Gokarn signaled yesterday. Prime Minister Manmohan Singh on Feb. 4 said India needs to tackle inflation with “great urgency” to sustain the economy’s momentum.

“Inflation risks are growing rapidly,” Shubhada Rao, chief economist in Mumbai at Yes Bank Ltd., said before the report. “Another rate increase next month is a huge possibility.”

The yield on the benchmark nine-year government bond rose one basis point in Mumbai today to 8.21 percent, a three-week high. The Bombay Stock Exchange’s Sensitive Index gained 0.2 percent while the rupee advanced 0.2 percent to 45.48 against the dollar.

Anti-Inflation Stance

Reserve Bank of India Governor Duvvuri Subbarao on Jan. 25 raised the key repurchase rate by a quarter-point to a two-year high of 6.5 percent and pledged “persistence with the anti- inflationary monetary stance” as he boosted the nation’s inflation forecast.

Subbarao said India’s benchmark wholesale-price inflation rate may be at 7 percent by March 31, more than the earlier estimate of 5.5 percent. The gauge stood at 8.43 percent in December. He maintained the RBI’s growth projection for the current financial year at 8.5 percent with an “upward bias.”

“A whole set of events unfolded in the Middle East which are starting to have an impact on oil prices and that is something which we didn’t anticipate at the time of making the policy announcement on Jan. 25,” Gokarn said yesterday in Dabolim, in the western Indian state of Goa. “It is going to have an impact on our thinking, on our actions going forward.”

India meets about three-quarters of its annual energy needs from imports. Oil prices could more than double if the unrest in Egypt forces the closure of the Suez Canal, Venezuelan Oil Minister Rafael Ramirez said Feb. 4.

Egypt’s Crisis

Protesters demanding an end to President Hosni Mubarak’s 30-year rule erupted Jan. 25 in Cairo and have left as many as 300 people dead, according to the United Nations. Concern that turmoil in Egypt could force the closure of the Suez Canal, halting crude shipments through the crucial waterway, sent North Sea Brent crude oil prices above $100 a barrel for the first time since October 2008 last week.

“There’s obviously a risk that the situation will transmit into higher commodity prices,” Gokarn told reporters in New Delhi today. “So, that intensifies the risk.”

Brent crude for March settlement climbed as much as $1.07, or 1.1 percent, to $100.90 a barrel on the London-based ICE Futures Europe exchange. Prices have climbed 44 percent in the past 12 months.

About 2.5 percent of world oil output moves through Egypt via the waterway and the Suez-Mediterranean Pipeline, according to Goldman Sachs Group Inc.

Opposition Talks

Egyptian Vice President Omar Suleiman and some members of the opposition yesterday agreed on limited steps to resolve the crisis, even as the government stood firm against the demand from protesters that Mubarak resign.

Subbarao, who has raised rates the most among Asian central banks in the past year, last month urged the government to cut subsidies including that on oil, saying “monetary policy works most efficiently while dealing with an inflationary situation when the fiscal situation is under control.”

While subsidies may contribute in the short term to keep supply-side inflationary pressures in check, they may “more than offset” this benefit by adding to aggregate demand, Subbarao said.

The comments build pressure on Finance Minister Pranab Mukherjee to cut the budget deficit, which has almost doubled in three years. Mukherjee, who is scheduled to announce this month the budget for the fiscal year starting April 1, is aiming to narrow the budget gap to 5.5 percent of gross domestic product in the year ending March 31. That compares with a shortfall of 2.7 percent of GDP in the year ended March 2008.

Excise Tax

In the last budget, Mukherjee increased the excise tax rate on manufacturers to 10 percent from 8 percent. It stood at 12 percent before the global financial crisis.

Yes Bank’s Rao said Mukherjee may boost the excise tax rate to 12 percent in next year’s budget.

Companies including Godrej Consumer Products Ltd., India’s second-largest maker of bath soap, say higher taxes will hurt profit, already squeezed by rising input costs. Godrej, which raised prices last month, may follow with more increases as “raw material costs are going up,” Chairman Adi Godrej said in a Feb. 4 interview with Bloomberg News.

“Raising taxes would be disastrous for the industry because we need stimulus very much as inflation is very high, interest rates have gone up again,” Godrej said. “Raising taxes would be a quite poor policy to my mind as it will hurt businesses.”

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net.

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

Euro-Region Inflation Jumps More Than Estimated to Two-Year High of 2.4%

European inflation accelerated more than economists forecast in January, keeping pressure on policy makers to monitor price gains that are exceeding the European Central Bank’s limit.

Inflation in the euro region quickened to 2.4 percent from 2.2 percent in December, the European Union’s statistics office in Luxembourg said today in a preliminary estimate without providing a breakdown. That’s the fastest since October 2008 and exceeded the 2.3 percent median estimate of 37 economists in a Bloomberg News survey.

Increasing commodity prices are adding pressure on companies to pass on higher costs. ECB policy makers will discuss the inflation outlook on Feb. 3, a day before European leaders gather in Brussels to advance their response to the sovereign-debt crisis. ECB President Jean-Claude Trichet has said he only expects euro-area inflation to “moderate again” toward the end of the year.

“Inflation looks set to remain under upward pressure in the next few months,” said Martin van Vliet, an economist at ING Group in Amsterdam. “Although we expect hawkish rhetoric from ECB policy makers, they are still unlikely to pull the trigger on interest rates until the fourth quarter.”

The euro extended its gain against the dollar after the inflation figure was published. It rose to as high as $1.3662 and was up 0.3 percent at $1.3651 as of 10:26 a.m. in London.

Oil, Wheat

Inflation in Germany, Europe’s largest economy, accelerated to 2 percent this month from 1.9 percent in December, while import prices jumped 12 percent last month from a year earlier, the most in more than 29 years. Spanish inflation also quickened this month and Italian producer-price inflation accelerated more than economists forecast in December.

Adding to the ECB’s inflation concerns, crude-oil prices have increased 8.4 percent over the past three months, while wheat costs have also surged. Harvard University Professor Kenneth Rogoff said in a Bloomberg Television interview with Erik Schatzker at the World Economic Forum in Davos, Switzerland, on Jan. 28 that “we’re likely to see continuing high commodity prices” as global growth stokes demand.

Faster inflation is already feeding into price expectations. A gauge measuring households’ assessment of price developments over the coming 12 months surged in January, the European Commission said on Jan. 27. An indicator of manufacturers’ selling-price expectations also increased.

‘Very Concerned’

Michael Cawley, chief operating officer at Ryanair Plc, Europe’s largest carrier, told Maryam Nemazee on Bloomberg Television’s “Countdown” from London today that he’s “very concerned” about rising fuel prices.

While policy makers have said the ECB’s key interest rate remains “appropriate” at a record low of 1 percent, Executive Board member Juergen Stark and council member Guy Quaden said on Jan. 26 that the bank will “act” if needed to counter so- called second-round effects, when workers demand higher wages in compensation for higher living costs.

German chemical workers are seeking up to 7 percent more pay and Volkswagen AG on Jan. 28 proposed to raise pay for 100,000 western German workers by 2.9 percent from June. That’s about half the increase sought by the IG Metall union.

The ECB, which aims to keep annual gains in consumer prices just below 2 percent, has forecast inflation to average around 1.8 percent this year and about 1.5 percent in 2012. Trichet said in an interview on Jan. 26 that the bank will “do what is necessary” to maintain price stability in the euro region.

Price Stability

“The current monetary policy of the ECB is still accommodative,” Stark said. “At the moment, our monetary analysis provides no indications for medium-term inflation pressure. Should our assessment change, however, we’ll act.”

Still, as governments toughen austerity measures to lower budget deficits and unemployment remains at the highest in over a decade, that may damp demand and force companies to keep price increases in check. German retail sales unexpectedly declined for a second month in December, data showed today.

French ECB council member Christian Noyer last week said he’s “confident” that the ECB will be able to keep inflation at bay, while Austria’s Ewald Nowotny said he doesn’t expect the central bank to raise rates in the first half of the year.

Euro-area core inflation, which excludes volatile costs such as energy prices, held at 1.1 percent in December, the statistics office said on Jan. 14. A breakdown of January consumer prices will be released next month.

Estonia this month became the 17th nation to join the euro region.

http://www.bloomberg.com/news/2011-01-31/euro-region-inflation-jumps-more-than-estimated-to-two-year-high-of-2-4-.html

China’s Property Prices Rise, Spurring Tightening Concerns; Stocks Decline

By Bloomberg News – Jan 17, 2011 8:37 AM GMT+0100 
China’s real estate prices rose for a 19th month in December, raising concerns that the government will expand curbs to limit the risk of asset bubbles in the world’s fastest-growing major economy. Property stocks fell.

Prices in 70 cities rose 6.4 percent in December from a year earlier, the smallest increase in 13 months, according to data from China Information News, the statistics bureau’s newspaper. That’s less than the 7 percent median estimate in a Bloomberg News survey of six economists. Prices gained 0.3 percent from November, the newspaper said today.

Home prices increased even as China suspended mortgages for third-home purchases and pledged to speed up trials of real estate taxes. The People’s Bank of China raised interest rates again on Dec. 25, after increasing them for the first time in three years in October.

“Home prices are still rising, especially for existing homes, and that may lead to concerns that the government will continue its tightening of the property market and more cities will impose a limit on home purchases,” said Cathy Yin, an analyst at Shenyin Wanguo Securities Co. in Shanghai. “Investors are using that as a catalyst to sell property stocks.”

Prices of existing homes climbed 0.5 percent in December, the most in three months, according to the report.

Property Stocks Fall

The gauge tracking property stocks on the benchmark Shanghai Composite Index slumped 5.4 percent at the close, the most among five industry groups on the measure. China Vanke Co., the nation’s biggest listed developer, lost 7 percent to 8.42 yuan, and Poly Real Estate Group Co., the second biggest, dropped 8.7 percent to 13.60 yuan, the most since April 19.

China’s central bank told lenders on Jan. 14 to hold more deposits as reserves for the fourth time in two months, lifting required ratios by half a percentage point. Premier Wen Jiabao said in a National Radio broadcast on Dec. 26 that measures to curb the country’s property market weren’t well implemented. The government also pledged to almost double the number of affordable housing to 10 million units in 2011.

“Continued increases in prices will worry policy makers, given how unaffordable homes have become,” said Dariusz Kowalczyk, economist with Credit Agricole CIB in Hong Kong. The slower price gain in December “is unlikely to be enough to prevent further measures to cool the market,” he said.

Rising Investment

Investment in real-estate development in December rose 12 percent to 557 billion yuan ($84 billion) from a year earlier, according to the report, while full-year investment climbed 33 percent to 4.83 trillion yuan. Property sales increased 22 percent to 1.02 trillion yuan during the month, with 218 million square meters (2.3 billion square feet) of real estate sold, a 12 percent gain from a year earlier, the newspaper said.

“There’s a lot of money in the system, interest rates are close to zero, so it is only natural” that money should be invested in real estate, said Ronnie Chan, chairman of Hang Lung Properties Ltd., Hong Kong’s third-biggest developer by market value which has almost half of its assets in China. “The fact that the government is able to perhaps slow it is a good sign” because it’s “very determined” to contain prices.

Sanya, a resort city on Hainan island in China’s south, posted the biggest price advance in December among the 70 cities monitored, with values rising 43 percent from a year earlier. That’s followed by 36 percent gain in Haikou, the capital city of the island province.

Meeting Targets

Guangzhou, capital of south China’s Guangdong province, and Quanzhou, a city in Fujian province, reported the smallest prices gains among the 70 cities, each rising 0.4 percent in December from a year earlier.

“The growth slowed because developers didn’t dare to raise prices in fear of more government curbs,” said Jinsong Du, head of property research for Credit Suisse Group AG. “Many developers launched more homes in the market last month to meet their annual sales target.”

Today’s numbers came after private data indicated higher sales in December. SouFun Holdings Ltd., the country’s biggest real-estate website owner, said home prices in 100 cities it monitors advanced 0.9 percent in December from November, the biggest gain for at least six months.

China’s land sales climbed to 2.7 trillion yuan in 2010, Land and Resources Minister Xu Shaoshi said on Jan. 7. China needs to push its land reforms because local governments are becoming more reliant on the sale of these sites to generate revenue, leading to social conflicts, he said.

Vanke, Shimao

China Vanke said revenue jumped 71 percent last year to 108 billion yuan, becoming the first developer in China to exceed sales of 100 billion yuan, a target it earlier set for 2014. Shanghai-based Shimao Property Holdings Ltd. said 2010 sales rose 34 percent to 30.5 billion yuan, and set a target of 36 billion yuan for this year.

Shanghai, China’s financial center, will this year prepare for a trial property tax, becoming one of the first cities in the nation to introduce the measure aimed at curbing speculative investment. Mayor Han Zheng announced the move in a speech to the Municipal People’s Congress yesterday, without giving details of how much the tax would be or when it would be implemented.

Shanghai and southwestern Chongqing are the two cities that will begin trials of a property tax, according to a Jan. 10 report by Nomura Holdings Inc., which expects China to selectively introduce a tax rate of about 0.8 percent.

–Bonnie Cao, Zheng Lifei, Jiang Jianguo, with assistance from Robyn Meredith in Hong Kong. Editors: Linus Chua, Malcolm Scott.

To contact Bloomberg News staff for this story: Bonnie Cao in Beijing at +86-21-6104-3035 or bcao4@bloomberg.net

 http://www.bloomberg.com/news/2011-01-17/china-property-prices-growth-slows-for-eighth-month-as-curbs-take-effect.html

Greece’s 2010 Deficit Shrinks 37%, Beating Target Included in Bailout Plan

Greece’s central government budget deficit, which sparked a European debt crisis, contracted by more than a third last year as spending cuts more than offset slower-than-forecast revenue growth.

The gap, which doesn’t include outlays by state-owned institutions and companies, shrank 36.5 percent to 19.6 billion euros ($25.3 billion), according to preliminary data released by the Finance Ministry. The decline was more than the 33.5 percent forecast in the government plan that helped Greece secure a 110 billion-euro bailout from its European partners and the International Monetary Fund. Final data are due on Jan. 20.

The Greek bailout prompted investors to shun bonds of the region’s high-deficit nations, sending borrowing costs in Ireland, Spain and Portugal to euro-era highs and forcing Ireland seek emergency aid in December. Prime Minister George Papandreou cut wages and raised taxes, triggering strikes and protests across the country, to make good on his pledge to trim the shortfall to 9.4 percent of gross domestic product last year.

“These figures give confidence that the 9.4 percent target is achievable,” said Ilias Lekkos, chief economist at Piraeus Bank in a telephone interview.

Risk Premium

The results also give the government a 1.5 billion-euro cushion to cover overspending by state-controlled enterprises, Lekkos said.

The yield premium that investors demand to buy Greek 10- year bonds over German bunds fell 27 basis points today to 946 basis points, after reaching a euro-era high of 978 basis points on Jan. 7. The yield on the country’s benchmark 10-year bond fell 29 basis points to 12.43 percent, more than four times the rate on comparable German debt.

Ordinary budget spending fell 9 percent last year to 65.3 billion euros from 71.8 billion euros in 2009, exceeding the government’s planned reduction of 7.5 percent.

State budget revenue increased about 7 percent, boosted by a tax-arrears settlement plan that increased income by around 1 billion euros in 2010. Ordinary revenue grew 5.5 percent, compared with a targeted increase of 6 percent. The government initially forecast a 13.7 percent increase for ordinary revenue and was forced to reduce the goal twice as increases in value value-added taxes and levies on alcohol, tobacco and fuel failed to generate enough income.

Recession Deepens

The austerity measures have deepened the country’s two-year recession and contributed to GDP contracting an estimated 4.2 percent last year. The government forecasts economic output to contract 3 percent this year.

Industrial production fell 7.6 percent in November from the same month a year earlier, more than the 5.2 percent decrease in November, the Athens-based Hellenic Statistical Authority said today. The biggest contraction came in electricity generation, which dropped 13.3 percent.

“The drop in domestic demand is worsening the climate for Greek production and the only supporting factor comes from external demand,” said National Bank of Greece SA economist Nicholas Magginas by telephone before today’s release.

To contact the reporter on this story: Marcus Bensasson in Athens at mbensasson@bloomberg.net

http://www.bloomberg.com/news/2011-01-10/greece-s-2010-deficit-shrinks-36-5-beating-target-update1-.html

Markets fall after Irish Republic 85bn euro bail-out

29 November 2010

The euro has fallen against the dollar and major European markets have dropped sharply, a day after ministers agreed a bail-out for the Irish Republic.

On Sunday, European ministers reached agreement over a bail-out worth about 85bn euros ($113bn; £72bn).

On Monday, the euro fell 1.4% to $1.309, a new two-month low.

And Irish, Spanish and Portuguese bond yields remained stubbornly high, indicating the market is not convinced European debt problems have gone away.

The leading European indexes all closed more than 2% lower.

The euro also fell against the pound, to 84.15p, its weakest since late September.

Greek debt
Irish Prime Minister Brian Cowen had called the 85bn euros package the “best available deal for Ireland”, but opposition politicians had their doubts.

“This is a hugely disappointing result for the country. It’s hard to imagine how this deal could have been much worse,” said Fine Gael finance spokesman Michael Noonan.

The focus is now on Portugal and Spain. Markets are taking a view that it is a question of when, not if, they have to go for some sort of bail-out”

David Jones
IG Index
“People are right to feel frightened, and worried about the future, when our own government has sold out the country on such lousy terms.”

Also on Monday, the European Commission said the Irish Republic, which will have the biggest budget gap in the EU of 32% this year because of the cost of supporting its banking sector, will reduce the shortfall to 10.3% next year and cut it further to 9.1% in 2012.

However, for 2011 it has kept its forecast unchanged at 1.5%, down from 1.7% for 2010.

At the same time, eurozone finance ministers have opened the way to a six-year extension to 2021 in the repayment period for a European Union and International Monetary Fund loan to Greece.

It would mean an increase in the interest rate charged to Greece, but the rate would not exceed the 5.8% rate the Republic of Ireland is paying for its bail-out.

The BBC’s Europe editor Gavin Hewitt said this was another sign that the reality for countries like Greece and Ireland was “years of increasing debt and austerity”.

Bank shares up

At the close of trade in London, the FTSE 100 was 2.1% down. Germany and France declined even more, with Frankfurt’s Dax down by 2.2% and Paris’s Cac 40 down by 2.5%.

Analysts suggested these falls, along with rising bond yields, reflected the persistent concerns in the markets about European debt levels, despite the Irish deal.

“Markets do not think this is going to draw a line under the problems,” IG Index’s David Jones told BBC News.

“The focus is now on Portugal and Spain. Markets are taking a view that it is a question of when, not if, they have to go for some sort of bail-out.”

Portuguese and Spanish Bond yields continued to rise throughout the day, indicating those heightened concerns about their ability to be able to pay back their debts.

And the cost of insuring Portuguese and Spanish debt against default rose to a record high on Monday.

But Germany’s finance minister Wolfgang Schaeuble attacked market speculation over the financial woes of Portugal as “irrational”.

At the same time he praised the rescue deal for the Irish Republic.

“The speculation on the international financial markets can barely be explained rationally,” he told German radio station Deutschlandfunk.

Countries are put under pressure, leading to “fear effects,” he said, adding “the markets can make a lot of money in this way.”

And French Finance Minister Christine Lagarde said the bail-out was “sufficient” and that “irrational” markets were not correctly pricing the sovereign debt situation in Europe.

“The amount [of the bail-out] is sufficient because that will keep Ireland afloat for three years,” she told RTL radio.

Europe’s leaders, who have recently added a tone of desperation in their comments about the euro’s future, have taken refuge in the long game while hoping that something turns up that enables countries such as Ireland and Greece to reduce their
France and Germany have also said the Republic of Ireland bail-out should draw a line under its debt crisis.

And they have expressed confidence in Portugal’s ability to correct its finances and avoid needing outside help.

An average interest rate of 5.8% will be payable on the loans, above the 5.2% currently paid by Greece for its bail-out.

Irish Prime Minister Brian Cowen said it was the “best available deal for Ireland”.

It provides “vital time and space to successfully and conclusively address the problems we’ve been dealing with since the financial crisis began”, he said.

He also said the country would take 10bn euros immediately to boost the capital reserves of its state-backed banks.

Another 25bn would remain in reserve, earmarked for the banks.

The Irish government has also said that interest payments on all state debt will account for more than 20% of tax revenues in 2014.

The deal does not require the Republic to change its low 12.5% corporation tax.

‘Appalling’
But as part of the bail-out, the Irish government will have to make an unexpected contribution of 17.5bn euros towards the 85bn euros total.

Dublin is poised to use its national pension fund and other cash reserves to achieve this.

Opposition parties Fine Gael, Labour and Sinn Fein have attacked this, and other elements, of the bail-out.

Main opposition party Fine Gael called the agreement “appalling”, saying the 5.8% annual interest rate on the loan was unaffordable.

http://www.bbc.co.uk/news/business-11860879

US Federal Reserve sets out first phase of bond buying

10 November 2010 Last updated at 22:18 GMT

Last week it said it would will pump $600bn (£373bn) into the US economy by the end of June.

Now it says the first stimulus will see it buying $105bn worth of government bonds, starting later this week until early December.

This stimulus marks the beginning of a second round of “quantitative easing” (QE).

Some analysts see QE as the last chance to get the US economy back on track.

Continue reading the main story
The theory behind QE

Central banks create money to buy government, and sometimes corporate, bonds, for three main reasons:

To reduce the cost of borrowing – buying government bonds increases their price and lowers their yield, or the interest they pay out, which in turn puts downward pressure on interest rates across the economy
To inflate asset prices – with bonds paying out lower interest rates, investors look to buy other asset classes, such as equities, pushing prices up
To increase lending – by paying money to banks to buy bonds, the banks then have more money to lend to businesses and individuals
The Wall Of Money: A guide to QE2
The Fed will buy $75bn of government debt as part of the new $600bn programme. It said it would buy another $30bn using the proceeds from its mortgage portfolio.

Wednesday’s announcement helped boost stocks and bond prices.

The US economy grew by an annual rate of 2% between July and September, which is not enough to reduce high unemployment.

Second step
US interest rates are already close to zero, which means the Fed cannot reduce rates any further in order to boost demand – the more traditional policy used by central banks to stimulate growth.

And so instead it announced a fresh round of QE, which the programme has been dubbed QE2, after the Fed pumped $1.75tn into the economy during the downturn in its first round of QE.

It is in addition to the Fed’s previously announced plan to reinvest $250bn-$300bn of repayments it is due from existing US mortgage debt investments over the coming year.

However opinions are divided about how effective QE2 will be, partly because of questions about how much impact the first, much larger, round of QE had.

Some observers credit the programme with pulling the US out of recession, while others argue that it had little impact on consumer demand and the tight credit conditions that make it hard for individuals and businesses to access bank finance.

What most do agree on, however, is that the Fed had to do something.

Latest figures showed that the US economy grew at an annualised rate of 2% between July and September.

The annualised rate is the rate at which the economy would grow over a year if the three-month growth rate were replicated over all four quarters.

While this was an improvement on the 1.7% annualised growth seen between April and June, it was less than the 3.7% annualised growth recorded in the first three months of the year.

Together, these growth rates are below the historical rates posted by the US economy during recoveries from past recessions.

Such modest rates of growth are having little impact on the high level of unemployment in the US, which currently stands at 9.6%.

It is this high level of unemployment that is acting as a key drag on economic growth.

http://www.bbc.co.uk/news/business-11731464

China’s inflation rate hits a two-year high

China’s inflation rate has hit a two-year high, largely thanks to rises in food prices, despite the government’s efforts to dampen price rises.

October inflation hit a higher-than-expected 4.4%, up from September’s 3.6%, the Bureau of Statistics said.

It added that the government needed to do more to control price rises.

Beijing has introduced a number of measures, including raising interest rates and curbing bank lending, to cool rapid economic growth and price rises.

Separate figures from the statistics bureau showed that industrial output in China rose by 13.1% in October compared with a year earlier, slightly slower than the 13.3% increase recorded in September, while retail sales rose by 18.6%.

Rate rises
“Price pressures are increasing. That means pressure on macroeconomic controls is increasing,” said bureau spokesman Sheng Laiyun.

This means interest rates are likely to rise, analysts said.

“More rate hikes are clearly on the way,” said Brian Jackson at the Royal Bank of Canada, who described the rise in the inflation rate as “eye catching”.

Mr Sheng also said that the US’s policy of pumping $600bn into its economy to stimulate growth would put further upward pressure on prices in China.

“The new round of foreign quantitative easing (QE) policy will release enormous liquidity, which will have rather a significant impact on the Chinese economy.”

The US’s fresh round of QE has been criticised by some countries as an attempt to devalue the dollar.

The issue of currency manipulation and global trade imbalances will be discussed later at the G20 meeting in Seoul.

http://www.bbc.co.uk/news/business-11732755

Dollar at new 15-year low against yen on G20 comments

25 October 2010 Last updated at 09:55

US Treasury Secretary Timothy Geithner said he believed China was ready to allow its yuan to rise
The US dollar has hit a 15-year low against the yen after the G20 nations agreed to avoid a currency war.

The weekend talks, in South Korea, saw the group of 20 major advanced and developing nations, agree to avoid competing to lower their currencies.

The meeting sparked another fall in the US dollar, which fell 1% against the yen to 80.52 yen.

The lower dollar also boosted the price of metals. In London trading, base metals rose by an average of 2.5%.

Copper was at its strongest since peaking at a record in July 2008, hitting $8,549 a tonne, while lead and zinc hit their highest in nine months.

The dollar is being undermined in part by the view that the US will start a new round of Quantitative Easing (QE).

Continue reading the main story
Related stories

US finance chief ‘upbeat on yuan’
G20 summit agrees to reform IMF
That has the effect of pumping money into the economy.

A lower currency can help to boost a country’s exports by making the goods relatively cheaper to foreign buyers.

China and the US are at the centre of the story, with the US most concerned about the level of China’s yuan, which does not trade freely on the currency markets.

The US wants China to allow the yuan to rise to make its own goods cheaper within the country, and China’s goods more expensive for US citizens.

At the weekend, US Treasury Secretary Timothy Geithner said he believed China was now “committed” to allow the yuan to rise in value.

Earlier this year, China promised greater “flexibility” in its currency approach, but since then the yuan has only increased slightly in value.

Many in the US say the yuan remains undervalued by as much as 20%.

http://www.bbc.co.uk/news/business-11618520

Investors bet Fed action will bring inflation

By Michael Mackenzie in New York
Published: October 17 2010 19:42 | Last updated: October 17 2010 19:42
US inflation expectations have jumped sharply in the past two weeks as investors bet that the Federal Reserve’s efforts to boost the economy by pumping in more money will succeed.

Fears over the prospect of a Japan-style “lost decade” of deflation and weak growth have prompted the Fed to show it is prepared to pursue an aggressive bond-buying policy and tolerate higher than normal inflation in the short term.

Ben Bernanke, Fed chairman, reiterated on Friday that the current underlying inflation level of 1 per cent was too low. Policymakers judge a rate of 2 per cent as being consistent with generating price stability and a growing economy.

The prospect of the Fed restarting its expansionary quantitative easing policy, also known as QE2, as early as next month has brought big falls in the dollar, rises in commodity prices and higher long-term Treasury yields – all of which are barometers of higher inflation expectations.

“The Fed is starting to convince the market that they can achieve higher inflation, while some policy officials actively want inflation to be above their target for a period of time,” said Michael Pond, co-head of US rates strategy at Barclays Capital.

In the bond market, expectations for inflation over the next 10 years have surged to 2.17 per cent from 1.80 per cent since the start of October. Investors have also backed away from 30-year Treasury bonds, as this long-term fixed-rate debt is highly influenced by expectations of inflation. Last week, the yield on 30-year bonds rose to a record 1.45 percentage points over the 10-year note yield.

The risk of tolerating a period of higher than normal inflation worries some in the bond market. There is also a danger that as the Fed seeks to push inflation higher, long-term bond yields and oil prices could rise sharply and short-circuit a sustained recovery in the economy.

“QE has an inherent tension in that for it to work, you need to drive bond yields lower, but if you are successful, you reflate the economy and then yields are too low,” said Alan Ruskin, strategist at Deutsche Bank.

“The market is rightly sceptical about the Fed’s ability to squeeze the inflation genie back into the bottle.”

With long-term US inflation expectations back above 2 per cent, they remain below the pre-financial crisis range of 2.25 per cent to 2.75 per cent and as such the market does not reflect the risk of the Fed tolerating a period of higher inflation.

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