Faced with uncertain outlook, rate setters slip into neutral

Mervyn King once likened the process of setting interest rates in the UK to driving a car with the windscreen blacked out. Policy makers had to judge where they were going by looking out of the rear window to see where they had been.
The delicacy of this manoeuvre means there are times when the Bank needs to slip into neutral and coast along for a bit. Yesterday it used the minutes of the monetary policy committee meeting earlier this month which voted 9-0 to keep rates at 5.75% to suggest that it had done just that."There was range of views about the risks to inflation and growth. The future path of Bank Rate would depend on the evidence in the months ahead about whether and how the risks were crystallising; most members emphasised that they had no firm views on whether rates would need to rise further," the Bank's minutes said.
Stripped down to basics, that remark means one thing: City speculation that the Bank will underline its get-tough approach to inflation with a sixth rise in the Bank rate in little more than a year when it meets next month is for the birds. If rates are to go to 6%, it will not be until later in the year and there is a good chance that 5.75% will be the peak.
Certainly, that is the growing sentiment in the financial markets. Sterling has slipped below $2 and looks vulnerable to further falls. In the money markets, three-month interbank rates have fallen below 6% for the first time in four months - a marked change of mood from a month ago when the talk was of borrowing costs going to 6.25% by the end of 2007 and staying there for the whole of 2008.
There are three main reasons why the Bank is now in wait-and-see mode. Firstly, recent economic data hardly suggests that further increases in the cost of borrowing are needed to curb inflation. The July consumer prices index showed the cost of living up 1.9% on a year earlier, below the government's 2% target and a far cry from the 3.1% in March that forced Mr King to write an explanatory letter to the then chancellor, Gordon Brown.
Weather
One of the MPC's hawks, Andrew Sentance, yesterday used a regional newspaper interview to warn against reading too much into one month's inflation data, and some analysts believe that there were one-off factors, such as the wet weather, which artificially suppressed inflation last month.
There is, however, evidence that consumer spending is slowing. The Royal Institution of Chartered Surveyors earlier this week reported a big drop in housebuyer inquiries, while the supermarket price war has been prompted by weaker demand.
Government figures released yesterday showed that inflationary pressure from the labour market remains minimal. Despite a fall in the claimant count unemployment rate to 2.6%, the growth in average earnings fell to a four-year low of 3.3%. Real disposable incomes fell in both the final quarter of 2006 and the first quarter of 2007, making it more difficult for consumers to maintain their spending habits.
The second factor - linked to the first - is the vulnerability of the UK to the global financial markets. In the year to June, output grew by 3%; of that, 1.3 percentage points came from financial and business services.
Stephen Lewis, an economist at Insinger de Beaufort, said: "The UK economy could take a hard knock from latest developments in global markets."
He added that of all the major central banks, the Bank of England had most reason to fear the macro-economic fall-out from the market turmoil, given the UK's dependence on financial services activity for GDP growth.
"There have been no horror stories yet from UK financial institutions relating to their exposure to the US mortgage mess. However, UK banks and financial advisers are liable to suffer indirectly, through a diminution in the flow of corporate deals. Such transactions have relied on investors' voracious appetite for risk. Now that appetite has turned to aversion, this type of financial activity will be scaled back."
Nick Parsons, head of market strategy at NAB Capital, said a financial market slowdown would affect not just dealers and analysts but ripple out to all the ancillary services that rely on the spending power of the City.
"Bonuses in E14 [the London district that contains the financial centre of Canary Wharf] had a big impact not just on London but on the growth of the whole UK economy. Take away those bonuses and you will have the same multiplier process, only in reverse."
Graham Turner, of GFC Economics, said: "London is incredibly vulnerable to a severe downturn in global financial markets. It has been the centre of the proliferation in credit derivatives products and the investment banking community has been a main driver of the UK economy.
"Had we not had the strength of the financial sector, average earnings growth across the economy would be below 3%."
Turmoil
With many analysts believing the market turmoil is likely to intensify over the coming months, a final factor is that the hawks on the Bank's monetary policy committee will find it harder to secure the votes necessary to raise rates. At present, the committee is divided into three distinct camps - those who think rates need to go to 6% at some point, those who think they do not, and the swing voters in the middle whose view will be decisive.
This latter camp includes the Bank's chief economist, Charles Bean, its financial markets director, Paul Tucker, and Kate Barker, one of the four outside experts. Bean, Tucker and Barker all voted against a rate rise in June before sanctioning tighter borrowing in July, and will need some convincing that the car is not going to stall if rates go to 6%.
Some analysts believe it is now or never for the hawks. "The longer the Bank waits", said Mr Parsons, "the harder it will be to raise rates."

Dubai in $4bn bid for Nordic OMX

The Dubai stock exchange has launched a $4bn (£2.02bn) cash bid to buy its Nordic counterpart OMX.The offer price trumps the $3.7bn recommended cash-and-share offer made by the US Nasdaq in May and could prompt a bidding battle for the firm.Stockholm-based OMX runs the Nordic Exchange, which gives investors access to the biggest firms in Scandinavia and the Baltic states.The move reflects the growing demand for consolidation in the sector.Speculation that the government-backed Borse Dubai, which runs the emirate's stock market, would pounce on OMX has heated up since last week when it bought a 27.4% stake in the exchange for 230 kronor ($33.3; £16.7) per share.That figure beat Nasdaq's 208.1 kronor per share offer made to buy OMX in May and is the price the Dubai exchange would pay for the rest of OMX shares if its bid is successful.The development comes amid a wider trend of consolidation among stock exchanges, as they try to cut costs, gain scale and become more efficient.Second setback?"This combination will establish OMX as the group's global platform, building on OMX's leading technology and strong brand to position it to become one of the fastest-growing major exchange networks in the world," said Borse Dubai chairman Essa Kazim.The government-backed Dubai group, which owns the emirate's exchange, is hoping that its more attractive offer will appeal to Stockholm-based OMX as well as the chance to gain access to the growing economic might of the the Gulf region."The board of OMX will consider the Borse Dubai offer as compared to the Nasdaq offer and will update shareholders in due course," the Swedish operator said.If the takeover is approved, it would mark a second setback for the technology-dominated Nasdaq, after its failed $5.3bn to buy the London Stock Exchange earlier this year.Following Borse Dubai's unsolicited approach on Friday, Nasdaq directors urged OMX shareholders to back their earlier offer, which has already been agreed by the OMX board.The US exchange operator has been desperately seeking a European partner after its rival, the New York Stock Exchange, won control of pan-European exchange owner Euronext in March.The $14.3bn deal created the first transatlantic stock market operator, and the world's largest.Meetings are now expected to take place between the Dubai exchange and shareholders from OMX, as well as with the Swedish government, which holds a 6.6% stake in the exchange.
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Nation's Largest Lender Borrows $11.5 Billion To Stave Off Bankruptcy After Mortgage Meltdown

NEW YORK (Reuters) - Countrywide Financial Corp. , the largest U.S. mortgage lender, said on Thursday it is drawing down an entire $11.5 billion credit facility to bolster liquidity as a shortage of credit devastates much of the mortgage industry.Shares of Countrywide fell $1.54, or 7.2 percent, to $19.75 in premarket trading. Through Wednesday, Countrywide shares had fallen by 50 percent this year.The drawdown was announced a day after a Merrill Lynch & Co. analyst said Countrywide could eventually face bankruptcy, and many investors said the Calabasas, California-based lender was having greater difficulty selling short-term debt.It also shows how liquidity strains have spread beyond subprime lenders to larger companies that made predominantly higher-quality loans."The big question is, can Countrywide survive," wrote Paul Miller, a Friedman, Billings, Ramsey & Co. analyst.He said if liquidity problems last more than a month, "Countrywide might be forced to sell assets at a deep discount, putting tremendous pressure on its book value and stock price."There is a scenario in which the current liquidity crises last for longer than three months and Countrywide is forced into bankruptcy; it will be ugly, but it can happen!" he said.Countrywide did not immediately return calls and an e-mail seeking comment.Countrywide's 5.8 percent notes maturing in 2012 fell 4.3 cents on the dollar to 85.7 cents, yielding 9.60 percent, according to Trace, the Financial Industry Regulatory Authority's bond pricing service.CONSTRAINEDCountrywide said the unsecured facility was provided by 40 large banks. More than 70 percent of the facility has a term of longer than four years, while the rest has a term of at least 364 days, it said."Along with reduced liquidity in the secondary market, funding liquidity for the mortgage industry has also become constrained," Chief Operating Officer David Sambol said. "Countrywide has taken decisive steps which we believe will address the challenges arising in this environment."
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More local phone service deregulated across Canada

Canada's telecommunications regulator on Friday approved new and more liberal rules to govern providers of local exchange phone service in more than a dozen municipalities from Rimouski to Victoria.The cities include Quebec City, Montreal, Ottawa-Gatineau, Toronto, Hamilton, London, Winnipeg, Saskatoon, Calgary, Edmonton and Vancouver.The move means that phone companies will not have to apply to the Canadian Radio-television and Telecommunications Commission for permission to introduce new services or set rates for home phone service.This marks the second round of local phone service deregulation, or forbearance. On July 25, the CRTC announced deregulation for Fort McMurray, Alta., Halifax, Fredericton and Charlottetown.For local service deregulation, there had to be at least two competitors in a city, each capable of covering 75 per cent of the market."Competition in the local phone market is going to heat up, and consumers can look forward to new and innovative service offerings becoming available from Bell in the near future," said Kevin Crull, Bell's president of residential services."We will have opportunities to simplify our pricing structure and develop new and innovative services and promotions that cross all of our lines of business," said Kelvin Shepherd, president of the consumer markets division at MTS Allstream.While phone companies applauded the CRTC move, the Public Interest Advocacy Centre criticized the decision."Telephone services are going the way of banking services — any discounts will be for big customers and the competition will not be strong enough to produce real benefits for ordinary consumers" said Michael Janigan, executive director and general counsel of the Ottawa-based PIAC.

Toyota's Quarterly Profit Up 32 Percent

Toyota, on track to overtake General Motors as the world's biggest automaker this year, said Friday its April-June profit jumped 32.3 percent to a record high for a quarter, lifted by strong overseas sales and a weaker yen.Surging gas prices have proved a big plus for the Japanese automaker, as drivers flock to Toyota's fuel-efficient models, including the Camry, the best-selling model in the U.S., and the Prius gas-electric hybrid."The results are fantastic," said Tsuyoshi Mochimaru, auto analyst with Lehman Brothers in Japan.Foreign sales are going strong, and the weak yen, which raises the value of overseas earnings when converted into yen, is making rosy earnings even rosier as Toyota's exports grow, Mochimaru said.Group net profit at Toyota, which also makes the Lexus luxury model and compact Corolla, totaled 491.54 billion yen ($4.1 billion) for the quarter through June, up from 371.50 billion yen the same period the previous year.Quarterly sales rose 15.7 percent on year to a record 6.523 trillion yen, or $54.7 billion. At current exchange rates, that's more than General Motors Corp.'s record quarterly sales of $54.5 billion, which the Detroit automaker marked in the second quarter of 2006.But Toyota kept what some analysts say is a conservative forecast for the full fiscal year through March 2008, projecting net profit to inch up just 0.4 percent to 1.65 trillion yen ($13.85 billion) on sales of 25 trillion yen ($209.78 billion).It also kept its vehicle sales target for the full fiscal year the same at 8.89 million vehicles."We posted substantial increases in both revenue and profit, our highest ever quarterly results," said Toyota Senior Managing Director Takeshi Suzuki.Toyota has already surpassed General Motors in global vehicle sales for the first half of the calendar year, selling 4.72 million vehicle to GM's 4.67 million. Many analysts believe Toyota will likely beat GM for the full year in both sales and production.The title of world's biggest automaker which GM has held for 76 years typically is determined by annual global vehicle production numbers. For the first six months of the year, Toyota and its group companies made 4.71 million vehicles worldwide, while GM estimates that it made 4.75 million vehicles during the period.
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ourt approves ABN's LaSalle sale

The sale of LaSalle was frozen by the Commercial Court in MayABN Amro's $21bn (£11.5bn) sale of its LaSalle unit to Bank of America was lawful, the Dutch Supreme Court says.
Some shareholders had tried to have the sale stopped on the grounds that ABN had not sought their approval first.
The ruling is good news for Barclays Bank, which made an offer for ABN dependent on LaSalle being sold.
Meanwhile a consortium led by RBS said it would go ahead with a revised offer for ABN Amro "on materially superior terms to Barclays' proposed offer".
RBS also said its new offer would "ot be conditional upon LaSalle remaining part of the ABN AMRO group".
Some ABN shareholders had been claiming to the court that the LaSalle sale was intended to block an offer from the RBS-led consortium, which also includes Santander and Fortis.
'No obligation'
Shares in ABN Amro, Barclays and RBS, the three main protagonists in Europe's largest banking tussle, all rose after the ruling was announced.
Analysts said this reflected the fact that although the judgment was positive for Barclays, it was by no means certain that it would prevail in the bid battle.
ABN has backed Barclays' 62.8bn euro ($85.3bn; £42.5bn) offer.
But Dutch group VEB, which represents small shareholders in ABN, argued LaSalle's planned sale to Bank of America effectively blocked a higher 71bn-euro bid from RBS and its partners, Spain's Santander and Belgium's Fortis, as their offer hinges on LaSalle not being sold.
The Dutch Commercial Court initially ruled in favour of the shareholders' group, preventing the LaSalle transaction.

The ruling boosts Barclays boss John Varley in the battle for ABN
But the advocate general, in his advice to the Supreme Court last month, disagreed and the Supreme Court upheld his view.
"The fact that the shareholders aim at selling their shares at the highest possible price involves no obligation for the board of directors of ABN Amro to obtain the shareholders' approval for the sale of LaSalle," the ruling stated.
"There should not be any unnecessary uncertainty about the carrying out of this agreement, into which the directors of ABN Amro were entitled to enter," it added.
'One battle'
Bank of America said it was "satisfied" with the ruling and would now look to complete the deal as soon as possible.
Far from admitting defeat, VEB said it believed it would ultimately succeed in forcing ABN Amro to consider the two bids on their financial merits.
"They may have won this battle but they will lose the war," said its director Peter Paul de Vries.
"I don't think the Barclays bid will be interesting for many shareholders because it is billions of euros lower than the alternative."
Analysts believe the RBS consortium could return with a fresh offer for ABN Amro, excluding the LaSalle business.
Whichever of Barclays or the RBS consortium eventually wins control of ABN, the deal will create one of the world's largest banking groups.

US retail sales fall unexpectedly

US retail sales unexpectedly dropped by 0.9% in June, a report from the US Commerce Department says - their biggest decline in almost two years.Sales were down 0.4% even without the effect of a slump in the car market, the cause of much of the fall.The month before, retail sales had risen by a revised figure of 1.5%.The problems in the housing market were reflected by a 3% fall in furniture sales and a 2.3% fall in sales of building materials and garden supplies.The figures are likely to add to fears about the prospects for the US economy, currently assailed by the problems with sub-prime mortgages and the risk of a knock-on effect on investment and lending.If retail sales stay weak, that could impact economic growth, since consumer spending accounts for two thirds of economic activity.Figures out on Thursday had led economists to expect better retail sales figures.The world's biggest retailer Wal-Mart reported better-than-expected 2.4% growth in June sales at US stores open for at least a year.The International Council of Shopping Centers said US chain store sales had also grown 2.4% in June.Christopher Low, chief economist at FTN Financial in June, warned against setting too much store by monthly figures, preferring the quarterly numbers."There was absolutely gangbusters growth in the first quarter," he said."The sales pace in the second is moderately strong, certainly not weak," he added.A poll by Reuters had predicted that retail sales would rise 0.2% in June.