Financial Freedom. Best business news.

U.K. house prices rose for the first time in two years in August as a dearth of homes for sale pushed up prices in London and the southeast, Hometrack Ltd. said.

The average cost of a home in England and Wales gained 0.1 percent from July to 155,800 pounds ($253,000), the London-based property-research company said in an e-mailed statement today. The increase, the first since July 2007, left house prices 6.7 percent lower than a year earlier, the smallest annual decline in a year.

The report adds to signs that Britain is emerging from the sharpest recession in more than six decades. The slump has pushed house prices down 12 percent since the market’s peak in September 2007 on Hometrack’s measure. Bank of England Governor Mervyn King said this month that any recovery will be “slow.”

“After seven consecutive months of rising demand, agents and surveyors now believe that prices can be pushed upwards without any detrimental impact on sales volumes,” said Richard Donnell, director of research at Hometrack. “The headline figures are being skewed by price rises that are restricted to relatively small pockets of the market suffering from a lack of housing for sale.”

Prices rose in Greater London, East Anglia and the southeast of England, Hometrack said. They were unchanged across the other seven regions surveyed.

Nationwide Report

Other reports show home values rising at a faster pace. Prices in England and Wales climbed 1.7 percent in July, the most since 2004, the government said Aug. 28. Nationwide Building Society said last week that house prices increased 1.6 percent in August, the fourth consecutive monthly gain and the biggest since 2006.

In London, prices for luxury homes increased for the fifth straight month in August, reducing the annualized decline to the lowest since October, Knight Frank LLP said Aug. 29. Such properties sold at the fastest pace since the market started to sink more than two years ago as overseas buyers took advantage of a weakening pound, according to the London-based broker.

The U.K. economy shrank 0.7 percent in the second quarter and unemployment is the highest since 1995. Banks are restricting lending even after the Bank of England cut its key rate to a record low 0.5 percent and flooded the banking system with cash by buying billions of pounds of assets with newly created money.

The difference between the average two-year mortgage rate of 5.18 percent and the two-year swap rate of 3.14 percent is the widest on record, Moneyfacts Plc said last week.

“Some of the fundamental obstacles to a sustainable housing market recovery still remain,” Donnell said. “Mortgage availability continues to be an issue for first-time buyers who require large deposits to access the market, while unemployment levels, set to rise further, will continue to impact buyer confidence.”

Source

General Motors said on Sunday it has agreed to set up a light commercial vehicle production venture with major Chinese automaker FAW Group, with total investment of 2 billion yuan ($293 million).

The 50-50 joint venture, based in the northeast China city of Changchun in Jilin province, will make light-duty trucks and vans, GM said in a statement.

“For us in China, this is an important complement to the rest of our portfolio,” Kevin Wale, president and managing director for GM’s China operations, told reporters in a conference call.

“We are well established in passenger vehicles and mini commercial vehicles and we haven’t had a presence in the truck segment. Adding a truck portfolio rounds that out.”

The venture will use two existing FAW plants in Changchun and the city of Harbin, also in the northeast, with combined annual capacity of roughly 90,000 vehicles, Wale said.

A greenfield plant, currently under construction in Harbin, will add 100,000 units of capacity by the end of next year, he said.

Vehicles made at the venture will carry the FAW brand and will focus on supplying the China market, but they could be exported under a GM brand through the Detroit automaker’s global network in the future, Wale said auto car loan.

GM is making Buick, Chevrolet and Cadillac models at its flagship China venture with SAIC Motor Corp. It also makes minivans, pickup trucks and the Spark compact car in a three-way tie-up with SAIC and Liuzhou Wuling Automobile.

SAIC-GM-Wuling sold 87,925 vehicles in July, up 90.7 percent from a year earlier, helped by Beijing’s stimulus initiatives to support the industry, including subsidies for buyers in rural areas.

GM, which now holds 34 percent of SAIC-GM-Wuling, has been seeking to raise its stake in the venture.

Domestic media reported earlier this month that GM had secured an initial deal to take over Liuzhou Wuling Auto’s 15.9 percent stake for roughly 300 million yuan ($43.9 million).

Wale reiterated the U.S. automaker’s interest in raising its stake in the venture but made no further comment on the issue.

($1=6.830 Yuan)

Read more

HAZELWOOD — Seventy years ago this summer, James S. McDonnell opened his new company, McDonnell Aircraft Corp., at Lambert Field.

McDonnell wasn’t from here but his choice came down to St. Louis and Memphis, Tenn. McDonnell chose St. Louis and moved his family here from Baltimore. And the rest, one might say, is aviation history.

Top executives of the Boeing Co. on Thursday marked those first 70 years of Boeing and its predecessors — McDonnell Aircraft and McDonnell Douglas Corp. — in St. Louis. The celebration was attended by hundreds of employees, local political leaders and organized labor.

Boeing’s defense arm is the second-largest employer in the St. Louis region with about 16,000 workers.

While celebrants focused mostly on the local history of military aircraft and weapon manufacturing, elected officials made a familiar plea for continued funding of the C-17 Globemaster III transport plane and the F/A-18 Super Hornet. The two Boeing-built aircraft are threatened by a shift in Pentagon spending priorities.

Secretary Robert Gates proposed capping U.S. orders for the C-17 at the 205 already in use or in production and a scaled-down purchase of F/A-18s in next year’s budget.

But Congress provided funding for eight more C-17s in this year’s emergency war spending bill.

Last week, Sen. Christopher S. "Kit" Bond, R-Mo, co-authored a letter seeking funding for a dozen more of the Boeing-built transporters in next year’s defense appropriations bill.

"We’re fighting hard," said Bond. "I would hope we could get 15 C-17s. With a tight budget, that may be much. I would like to see a multiyear (purchase) for the F/A-18s. We can make it more efficient for Boeing … if we give them a plan for buying over several years. And that makes it cheaper for the taxpayers."

Bond added that there is a "minimum amount of high enthusiasm" for such a deal in the Pentagon.

Sen. Claire McCaskill, D-Mo., said she has heard military members speak in glowing terms about the capabilities of the F/A-18s and C-17s.

"Pound for pound, dollar for dollar, capability, reliability, you have built a tremendous fighter jet," McCaskill said of the Super Hornet.

George Roman, St. Louis regional executive of Boeing Integrated Defense Systems, and John Van Gels, St. Louis senior site executive, said the fate of federal spending on the aircraft will become clear this fall.

"It’s a long fight still," Roman said.

Boeing shares rose $4 to $51.82 a share on Thursday amid news that its long-delayed 787 Dreamliner passenger jet should be ready for its first flight by the end of this year.

"While there is no question that the execution of this program has had its challenges, … the 787 … remains on track to be a game changer for our airline customers," Boeing President and CEO Jim McNerney said in a conference call on Thursday.

Source

The man who may become Germany’s finance minister after next month’s elections, Hermann Otto Solms, says tax and spending cuts are needed to lift the nation out of its worst economic crisis since World War II.

“We believe that tax reductions are good for growth and employment and if you have more employees you have more taxpayers,” Solms said in an interview on Aug. 25 in his Berlin office overlooking the 19th century Reichstag building that houses parliament. A “big tax reform” is a non-negotiable demand for potential coalition talks after the Sept. 27 vote.

Solms, 68, a vice-president of Germany’s parliament who rides a BMW motorcycle, wants to guide his Free Democratic Party back to power after 11 years in opposition. Chancellor Angela Merkel says she wants to dump her current Social Democratic coalition partner and govern with the FDP. Polls since December have given the two allies a combined 50 percent or more, enough to form a government.

If replicated on election day, Solms, the FDP’s finance policy spokesman, is a leading candidate to replace Social Democratic Finance Minister Peer Steinbrueck, a persistent critic of what he terms the “Anglo-American” financial model.

“Solms will be the next finance minister,” said Friedrich Thelen, former parliamentary editor of the business magazine Wirtschaftswoche and founder of Thelen-Consult, a Berlin-based business advisory group. “There’s nobody else.”

Record Borrowing

If he gains office, Solms will inherit falling tax revenue and borrowing forecast to surge to a postwar record. The budget posted a 17.3 billion-euro ($24.7 billion) deficit in the first half of this year as the government boosted subsidies for companies to keep workers on the payroll during the crisis, the Federal Statistics Office said Aug. 25. The budget was close to balanced in 2008.

Solms’s party leader, Guido Westerwelle, criticized the government’s first stimulus package, worth 50 billion euros, as the “most expensive election campaign in German history.”

While Solms said he didn’t want to talk about Cabinet posts before the vote, he said he has no illusions about how difficult it will be for Germany’s next finance minister to reassert budget discipline.

“In the finance ministry you are responsible for everything,” Solms said. “Finance ministers are never loved. Yet just like an executive who takes over a company in a crisis one has a chance to really improve things.”

Kohl, Brandt

The FDP last served in government under Christian Democrat Chancellor Helmut Kohl from 1982 to 1998. From 1969 to 1982, the party was junior partner in the governments of Social Democratic Chancellors Willy Brandt and Helmut Schmidt.

If the FDP doesn’t win enough votes in four weeks to rule with Merkel, Solms said he’ll recommend the party stay in opposition rather than seek an alliance with the Social Democrats.

The FDP’s platform calls for simplified, lower income tax rates between 10 percent and 35 percent. Germany’s top income tax bracket is currently 45 percent and the lowest is 14 percent. The CDU wants to drop the lowest bracket to 12 percent and raise the threshold for the 45 percent rate to 60,000 euros from 52,000 euros.

The FDP also wants to revamp inheritance tax on family businesses, which Solms said “is driving lots of business people abroad.”

While praising what he called Merkel’s swift reaction to the global financial crisis last year, Solms said Merkel’s bad- bank law was problematic because “no bank will take advantage of it unless they’re on the brink of insolvency.”

He also condemned Merkel’s moves on bank supervision, saying “here, nothing has happened.”

Aristocratic Title

An aristocrat from Hesse in central Germany, Solms’s full name is Hermann Otto Prince zu Solms-Hohensolms-Lich. He said he decided to drop the title “because I am a convinced democrat and people should be measured by their achievements and not by their origins.”

Solms never knew his father, a Luftwaffe fighter pilot, who was killed during World War II shortly before his birth. He said among his earliest memories as a 4-year-old boy was the arrival of American troops in March 1945.

“I have this image of the Americans rolling into our village with their tanks,” he said. “It was a feeling of relief.”

Solms studied agricultural economics in the U.S. from 1969- 1970 at Kansas State University in Manhattan, Kansas.

“Naturally, one gets to know the American soul better in the Midwest rather than in New York,” Solms said. “That’s why I still think I can understand Americans better.”

Thelen said Solms’s almost 30 years in parliament means he knows how to navigate the pressures faced by the man responsible for the nation’s finances.

“They’ll need someone as a power-broker and Solms will do it,” Thelen said.

Source

Poland’s central bank will probably leave the benchmark interest rate unchanged at a record low for a second month after inflation accelerated and signs emerged economic growth is picking up, a survey of economists shows.

Policy makers will keep the seven-day reference rate at 3.5 percent today, according to all 20 economists surveyed by Bloomberg. The central bank will announce its decision early this afternoon in Warsaw.

The Narodowy Bank Polski has probably ended a series of reductions after trimming the main rate by 2.5 percentage points since November as the economy, the only one in eastern Europe to avoid a recession, is poised to pick up pace. The biggest jump in retail sales this year fueled gains in the zloty and the rising inflation rate suggests there’s no room for reductions.

“The probability of another rate cut has vanished,” said Radoslaw Bodys, an economist at Bank of America Merrill Lynch in London.

The zloty rose 0.5 percent against the euro yesterday, closing at 4.0847 to the common currency from 4.0993 in the previous trading day.

Nine of 15 economists polled by Bloomberg yesterday said there will be no further cuts and seven see an increase as soon as the middle of next year. Last month, 10 of 15 economists predicted one more rate cut, most likely in October.

Mounting Evidence

Still, central bank Governor Slawomir Skrzypek has maintained the bank is not finished lowering borrowing costs, even after policy makers left the benchmark rate unchanged on July 29.

Since the last decision, the statistics office reported the July inflation rate rose to 3.6 percent, exceeding the bank’s preferred range of 1.5 percent to 3.5 percent, while core inflation, excluding food and energy costs, accelerated for a sixth month to the fastest pace in eight months.

Wages rose an annual 3.9 percent in July, almost double the June gain, and retail sales expanded an annual 5.7 percent, the biggest advance this year.

“It’s too early to expect a hike, but Poland may be added to the list of countries that will likely be among the first to tighten policy, following Israel’s surprise move yesterday,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, in a note to clients.

‘Shut the Window’

Accelerating inflation has “shut the window” on further easing, policy maker Dariusz Filar said on Aug. 13 after the publication of consumer-price data. Others in the 10-member rate-setting board have expressed similar sentiments.

“Our baseline assumption is that the easing cycle is over,” said Grzegorz Maliszewski, chief economist at Bank Millennium SA in Warsaw, who predicted the first quarter-point increase will come in late 2010.

Still, six of 15 economists in the survey continued to predict a further quarter-point cut in late 2009 or the first half of 2010.

“It’s too early to say definitively there will be no more rate cuts,” said Dariusz Winek, the chief economist at Bank Gospodarki Zywnosciowej SA in Warsaw. “The July retail figures significantly reduced the chances.”

The government, which downgraded its growth forecast in June to an annual 0.2 percent from 3.7 percent, may consider upgrading its estimate after the Aug. 28 publication of second- quarter data, said Deputy Finance Minister Ludwik Kotecki.

Zbigniew Chlebowski, an official of the ruling Civic Platform party, said gross domestic product in the second quarter may have risen 1 percent, compared with an economists’ median forecast of 0.5 percent in a Bloomberg survey.

Source

The U.S. dollar rose versus the yen Friday after a report showed better-than-expected U.S. housing data in July and Federal Reserve Chairman Ben Bernanke said prospects for return to growth in the near-term appear good both in the U.S. and abroad.

U.S. stocks extended gains and demand for the greenback rose as analysts said both headlines boosted hopes for the global economic recovery and increased risk appetite among investors.

"Existing home sales and the Bernanke speech came out simultaneously," said Alan Ruskin, global head of currency strategy at RBS Global Banking & Markets in Stamford, Conn. "Both Bernanke and home sales were ‘all aboard’ the recovery story!"

In mid-morning trading in New York, the dollar was up 0.2% at ¥94.34, near a session high, after trading as low as ¥93.40 earlier, according to Reuters data.

The euro initially extended its advance versus the dollar after the headlines but it gave up most of those gains to trade last up 0.5% at $1.4319.

"After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good," Fed Chairman Ben Bernanke said in remarks prepared for delivery to an annual Fed conference.

"Although we have avoided the worst, difficult challenges still lie ahead," he said, cautioning that the "recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels."

Meanwhile, an industry survey showed sales of previously owned U.S. homes in July notched their fastest pace in nearly two years, the strongest sign yet that housing was pulling out of a three-year slump.

"Both (Bernanke and housing data) were more bullish than what the market was looking for. The market is just taking those headlines as extreme positives for the outlook both in the U.S. and globally," said Jacob Oubina, currency strategist, Forex.com Bedminster, N.J. 

Source

The dollar’s role as a good store of value is “questionable” and the currency has a high degree of risk, said Nobel Prize-winning economist Joseph Stiglitz.

“There is a need for a global reserve system,” Stiglitz, a Columbia University economics professor, said at a conference in Bangkok today. Support from countries like China should ensure orderly discussions on a new reserve system, he added.

The dollar has lost 12 percent since March 5 against an index comprising the euro, yen and four other major currencies. China, the world’s largest holder of foreign-currency reserves, and Russia have both called for a new global currency to replace the dollar as the dominant place to store reserves.

“The current reserve system is in the process of fraying,” Stiglitz said. “The dollar is not a good store of value. Right now, the dollar is yielding almost no return and yet anybody looking at the dollar has to say there’s a high degree of risk.”

The dollar will weaken as the U.S. pumps “massive” amounts of money into the economy, according to Curtis A. Mewbourne, a portfolio manager at Pacific Investment Management Co., the world’s biggest manager of bond funds.

Still, pessimism over the dollar’s prospects may be excessive, with its status as the world’s reserve currency still intact, said David Woo, global head of foreign exchange strategy at Barclays Capital in London.

“The reserve currency issue was a big issue three months ago,” Woo said in a Bloomberg Television interview yesterday. “But guess what? The dollar hasn’t gone anywhere over the last three months for the most part and if anything, we’ve seen a slowdown in dollar-selling by central banks.”

Flood of Liquidity

Policy makers in the U.S. and Europe have flooded the global economy with liquidity, which could lead to speculative bubbles due to limited opportunities for investment, Stiglitz said. The Nobel Prize winner said he was not confident of the Fed’s claim that it would withdraw liquidity when needed.

Under Chairman Ben S. Bernanke’s stewardship, the Fed cut the benchmark lending rate to as low as zero and expanded credit to the economy by $1.1 trillion over the past year. In the euro region, the European Central Bank has reduced interest rates to a record low of 1 percent.

“As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future?” Stiglitz told the conference free credit report online. “Right now we’re facing deflation, but some time in the future, there will be consequences.”

Asset Bubbles

The liquidity pumped into the U.S. economy may also end up elsewhere, including in Asian property and stocks, Stiglitz said later in Bankgok.

“The liquidity is going to be spent, but not necessarily in America,” he said. Asian economies may have to “protect against an American-led asset bubbles.”

The global financial crisis also signals the failure of American-style capitalism, Stiglitz told the conference. The worldwide financial system only worked because of repeated government bailouts and markets have been saved from their failures to allocate risk, he said.

Stiglitz said more collective action was needed on a global level to address the crisis and that the Group of 20 has been slow in addressing fundamental problems such as weak aggregate demand. Finance ministers and central bankers from the G20 are due to meet in London on Sept. 4-5.

Early Stages

The global financial crisis, which began with the collapse of the U.S. subprime-lending market in 2007, has led to almost $1.6 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg.

Treasury Secretary Timothy Geithner said yesterday the U.S. recovery is still in its early stages, propelled by an improving job market and a housing industry that’s beginning to stabilize.

“We have a long way to go, but we are starting to see signs of stability, and these signs mark the first steps to recovery,” Geithner said in prepared remarks in Berea, Ohio.

Stiglitz has a more pessimistic view on the U.S. economy, saying that while the worst of the recession may have passed, the likelihood of unemployment in the next one to three years being higher than it had been was “very great.”

The economist shared the Nobel Prize in 2001 for work on problems that may arise in markets when parties don’t have equal access to information. He was formerly chairman of the White House Council of Economic Advisers under Bill Clinton.

Stiglitz was also the chief economist at the World Bank between 1997 and 2000, during which he clashed with the White House over economic policies it supported at the International Monetary Fund.

Source

President Barack Obama’s budget office will announce the government’s deficit for 2009 will total $1.58 trillion, about $262 billion less than forecast in May, according to an administration official.

The White House’s biannual budget review set for release next week will show the outlook for the fiscal year ending Sept. 30 improved primarily because of reduced costs associated with the stabilizing economy. That has allowed the administration to scrap a $250 billion contingency plan to aid the financial industry, the official said.

The reduced deficit is also attributable to fewer bank failures than anticipated, which meant spending at the Federal Deposit Insurance Corp. will be $78 billion less than forecast, said the official, who requested anonymity because the figures haven’t been publicly released.

The deficit figure, as revised, would amount to 11.2 percent of the nation’s economy, the official said. That would be the biggest share since 1945.

“It’s better than we expected but it’s still a huge deficit,” said Stan Collender, a former congressional budget aide who is a partner at Qorvis Communications in Washington. He said the administration deserves “some credit here for managing the financial bailout situation so that they didn’t need another one,” adding that Obama and his aides faced “a very unstable situation when they walked in cheap car insurance.”

The administration’s mid-session review, slated for release on Aug. 25, will update the White House’s economic and budget forecasts with revised estimates of GDP growth, unemployment and future deficits. The administration official declined to discuss any other details in the report.

The nonpartisan Congressional Budget Office, which in June estimated this year’s deficit would reach $1.825 trillion, is also scheduled to release a revised estimate on Aug. 25.

Previous Estimate

The Obama administration had previously pegged this year’s shortfall at $1.84 trillion and next year’s deficit at $1.26 trillion. Tax revenue this year will total $2.074 trillion, the official said, which would be down 18 percent from last year, a reflection of the slow economy. Spending will grow to $3.653 trillion, which would be up almost 23 percent from 2008.

Federal spending has been driven up in part by the $787 billion economic stimulus package enacted in February, a $700 billion bailout of the financial industry, takeovers of mortgage financiers Fannie Mae and Freddie Mac and the increased costs of running safety-net programs such as unemployment insurance.

Source

Confidence among U.S. homebuilders rose to a one-year high, another sign that the worst of the housing decline that began in 2006 has passed.

The National Association of Home Builders/Wells Fargo confidence index climbed to 18, matching forecasts by economists and reaching the highest level since June 2008, the Washington-based group said today. A reading below 50 means most respondents view conditions as poor.

Lower prices and government tax credits for first-time buyers have stabilized home sales, setting the stage for builders to gradually step up construction from record lows. Job losses, rising foreclosures and tight credit are a reminder that any recovery in housing will be slow to develop, limiting sales at builders such as D.R. Horton Inc. and Pulte Homes Inc.

“Inventory is being cleared and that is starting to benefit the new-home market,” said Julia Coronado, a senior U.S. economist at BNP Paribas in New York. “With a few months’ lag, that will lead to a turnaround in construction activity.”

Stocks dropped around the world as investors speculated the recent rally in riskier assets had outpaced prospects for economic growth. The Standard & Poor’s 500 index fell 2.3 percent to 981.05 at 1:41 p.m. in New York. The S&P builder supercomposite was down 3.3 percent.

Matches Forecast

The index was forecast to increase to 18 this month from 17 in July, according to the median estimate of 37 economists surveyed by Bloomberg News. Projections ranged from 17 to 21.

The gauge reached a record low of 8 in January and averaged 16 in 2008. It was first published in January 1985.

The confidence survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. It also asks participants to assess the outlook for the next six months.

Last month’s gain was led by an increase in sales expectations over the next six months, which reached the highest level since April 2008. The measure of buyer traffic also improved, while a gauge that tracks current sales was little changed.

The increase in expectations “reflects anticipated sales stemming from the tax credit as well as recent signs that an economic recovery has begun,” David Crowe, chief economist of the builders’ group, said in a statement. “There is definitely a sense of hope among builders that the worst of the downturn is over and that a turning point is near at hand payday loan.”

Buyer Credit

In a bid to boost the housing market, the Obama administration’s stimulus measures included an $8,000 tax credit for first-time home buyers for purchases completed by Dec. 1.

Confidence increased in three of four regions, led by a jump in the Northeast. The South was the only area where confidence fell.

Builders probably broke ground on more houses in July for a third month, economists surveyed by Bloomberg forecast the Commerce Department will report tomorrow. Starts probably rose to a 598,000 annual pace from 582,000 in June, according to the survey median. Starts are down 74 percent from their January 2006 peak.

Other housing data in recent months have also signaled the market has bottomed. Combined sales of both new and existing homes have risen for four out of five months since January. That helped push the total number of houses on the market in June down to 4.1 million, a million less than the peak in July 2007.

Prices Stabilizing

Home price declines are also slowing. The S&P/Case-Shiller index of home prices in the 20 largest cities fell 17.1 percent in May from a year earlier, the smallest 12-month drop in nine months. The index rose 0.5 percent from the prior month, the first such gain since July 2006.

While the overall economy is showing signs of emerging from the worst recession since the 1930s, any recovery will be slow to develop. Economists surveyed earlier this month forecast unemployment will reach 10 percent by 2010 and gains in consumer spending will be smaller than the average over the last decade as Americans rebuild savings.

Homebuilders are still racking up losses. Forth Worth, Texas-based D.R. Horton and Pulte Homes, based in Bloomfield Hills, Michigan, on Aug. 4 reported quarterly losses and said the outlook for the housing market remains difficult. The companies are the first- and second-largest U.S. homebuilders.

“Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for homebuyers and weak consumer confidence,” Chairman Donald Horton said in a statement.

Source

The Reserve Bank of Australia will have to raise the benchmark interest rate from its “emergency” level at some stage as the economy rebounds from the global recession, bank Governor Glenn Stevens said.

“There will come a time when the exceptional monetary stimulus in place at present will no longer be needed,” Stevens said in his half-yearly testimony to parliament’s economics committee in Sydney today. “It will then be appropriate for the board to do what it has done on past such occasions, namely to start adjusting interest rates back towards normal levels.”

The Australian dollar and bond yields jumped on mounting speculation the central bank may increase borrowing costs before the end of the year. A more normal level for the overnight cash rate target is “a good deal north” of the current 49-year low of 3 percent, Stevens said today.

“The bank is clearly going to hike rates soon — year end is the most likely time,” said Adam Carr, an economist at ICAP Australia Ltd. in Sydney. Stevens points out that “the economy is more resilient than most thought it would be, global growth is leveling out and financial markets have stabilized,” he said.

The economy grew 0.4 percent in the first quarter, rebounding from its first contraction in eight years in the previous three months, as lower borrowing costs and government spending stoked domestic demand. Stevens said today it appears that gross domestic product also expanded in the second quarter.

Currency Climbs

Australia’s currency advanced to 84.65 U.S. cents at 11:20 a.m. in Sydney from 84.17 cents before the governor’s testimony began. The two-year government bond yield rose 8 basis points to 4.53 percent.

Traders have a more than 90 percent expectation that the central bank will raise the benchmark rate by half a percentage point before the end of 2009, according to interbank futures on the Sydney Futures Exchange as of 11:36 a.m. local time. A month ago, the futures implied the rate would remain unchanged.

“What we’ve got is an emergency setting” for the benchmark rate that was “put in place in anticipation that the economy would be seriously weak,” Stevens said no fax payday loans. “As the set of risks that we think you face start to shift, at some point you have to move away from the emergency setting.”

Last week, the central bank scrapped its forecast for the economy to contract this year, instead predicting GDP will expand 0.5 percent. The bank expects growth to accelerate to 2.25 percent in 2010 and 3.75 percent in 2011.

Shallow Slowdown

“On the basis of the information to hand at present, this may well turn out to be one of the shallower recessions Australia has experienced,” Stevens said. Low interest rates risked stoking economic imbalances, he added.

The Reserve Bank board slashed the overnight cash rate target by 4.25 percentage points between September and April. As well, the government distributed A$12 billion ($10.2 billion) to households and pledged to spend A$22 billion on roads, ports, railways, schools and hospitals.

Stevens didn’t provide a timeframe for when the central bank may begin raising rates.

“It’ll be the right thing to start removing it before it’s excessive,” Stevens said in response to questions. Policy makers will remove monetary policy stimulus “in a timely fashion and when the time is right,” he added.

“The emphasis on removing the ‘emergency’ setting of the cash rate was emphasized and re-emphasized” by Stevens, said Annette Beacher, an economist at TD Securities Ltd. in Singapore.

“While coy about timing, there is no doubt that at this point the governor is looking to withdraw the extraordinary stimulus in the economy.”

Stevens declined to identify what policy makers regard as a so-called normal or neutral policy setting, though he said the benchmark rate has averaged in the 5 percent range for the last 20 years, which he characterized as the “low inflation world.”

He added that a more normal level for the key rate is “a good deal north of what the cash rate is now” and borrowing costs could go “noticeably” higher.

Source