Battellino Says Pressure in Australian Money Market (Update3)

 
By Gemma Daley and Laura Cochrane

Aug. 28 (Bloomberg) -- Australia's money market remains ``under pressure'' and the central bank will intervene if needed to stabilize the cost of credit, Reserve Bank Deputy Governor Ric Battellino said.

Australia's central bank added A$3.87 billion ($3.2 billion) to the financial system on Aug. 17. It has injected more than A$3 billion only three times this year, all since Aug. 10.

``These operations have held the cash rate at the target and helped stabilize conditions more normally. Nonetheless some pressures remain,'' Battellino told a retail financial services forum in Sydney today, according to speech notes. ``If market developments warrant, the bank has the scope to further expand the provision of liquidity.''

Central banks pumped billions of dollars of emergency cash into markets this month as commercial banks became hesitant to lend.

Sales of previously owned homes in the U.S. fell to a five- year low in July and the glut of unsold properties climbed to their highest since 1991, according to a report by the National Association of Realtors in Washington yesterday. The data sent investor optimism about the outlook for the U.S. financial markets to a one-year low amid concern the housing slump will deepen.

`Banks Sound'

Australian banks are in ``very sound'' condition and have experienced ``minimal credit losses,'' Battellino said.

``They were nonetheless affected by the spread of the global money-market turmoil,'' he said. ``Yields on asset-backed commercial paper as yet haven't fallen, indicating a continuing high degree of nervousness.

``A market adjustment had to take place in commercial-backed paper yields. The problem isn't over yet, it's a global situation that comes from the U.S. subprime market.''

Yields on short-term debt in Australia surged more than 30 basis points, or 0.30 percent, in the past two weeks to between 30- 40 basis points more than the benchmark swap rate, according to the Commonwealth Bank of Australia, the nation's second-largest lender.

Units of Australian banks such as Westpac Banking Corp. and Commonwealth use short-term loans to finance investment in longer- term securities such as asset-backed bonds. The profit usually delivered from this strategy is being cut by rising yields.

Bank Bills

``Activity in this market dried up sharply, the effect being that for a time funding wasn't available at any price,'' Battellino said. ``The volume of securities issued has fallen, and the maturities have shortened.''

About A$60 billion of commercial paper, with maturities from 30 to 90 days, is typically sold in Australia each month, according to figures from Standard & Poor's.

The Reserve Bank's operations undertaken in bank bills has risen to 80 percent, compared with the usual 30 percent, Battellino said.

The Reserve Bank on Aug. 8 raised its benchmark interest rate to 6.5 percent, the highest in 11 years, to curb inflation.

The Australian dollar snapped six days of gains, falling to 82.52 U.S. cents at 9.59 a.m. in Sydney from 83.18 cents late in Asia yesterday.

BOJ to Raise Interest Rates Gradually, Minutes Show (Update1)

 
By Jason Clenfield and Mayumi Otsuma


Aug. 28 (Bloomberg) -- The Bank of Japan will raise interest rates gradually based on developments in the economy and prices, minutes released today show.

``The bank would adjust the level of interest rates gradually in accordance with improvements in the economic and price situation,'' policy makers said at the July 11-12 meeting. Members agreed that their ``basic thinking remained unchanged.''

The bank kept the benchmark overnight lending rate at 0.5 percent at the meeting, which was held before the threat of a global credit crunch compelled central banks, including the Bank of Japan, to inject extra funds into their financial systems. The bank stood pat again on Aug. 23 after the market turmoil clouded the outlook for Japan's economic growth.

Governor Toshihiko Fukui told reporters after last week's decision that keeping borrowing costs too low may spur risky investments, suggesting the bank still plans to raise rates.

``The economy is developing much as the Bank of Japan had expected, and Japanese money markets have worked relatively well throughout the global crisis,'' said Julian Jessop, chief international economist at Capital Economics in London. ``The bank will therefore want to continue to return interest rates toward more normal and sustainable levels.''

The yen traded at 115.57 per dollar at 9:42 a.m. in Tokyo from 115.63 before the minutes were published.

Investors see a 34 percent chance policy makers will raise the key rate at the Sept. 18-19 board meeting, according to Credit Suisse Group calculations based on interest payments.

Subprime Slump

Some board members at the July meeting suggested the U.S. housing market slump might impede economic growth. Should losses on subprime mortgage investments ``seriously'' affect credit markets, damage to the Japanese and global economy ``could not be ruled out,'' they said, according to the minutes.

One member said the ``slowing of the increase in housing prices had reduced the availability of consumer credit, thus affecting consumption behavior'' in the U.S. Still, the nine members agreed that the world's largest economy would probably achieve a soft landing by the year's end.

Fukui will be watching the subprime issue ``very closely because the Japanese outlook is intrinsically linked to the global economic outlook,'' said Katie Dean, a senior economist at Australia & New Zealand Banking Group Ltd. in Melbourne. ``The likelihood of the Bank of Japan raising rates before the end of this year is now very slim.''

Mizuno's Dissent

One policy maker said raising interest rates last month was ``justified by economic conditions,'' the minutes show. Board member Atsushi Mizuno was the sole dissenter in July and August, proposing a rate increase at both meetings.

Mizuno is scheduled to give a speech to business executives on Aug. 30 at 10 a.m. in Kofu, near Tokyo. He will also hold a press conference later that day.

The members agreed that Japan's consumer-price inflation would probably hover around zero in the coming months but that prices are likely to rise in the long term.

Consumer prices excluding fresh food probably fell 0.l percent in July, a sixth monthly drop, according to the median estimate of 40 economists surveyed by Bloomberg News.

German August Business Confidence Probably Fell to 10-Month Low

 
By Simone Meier

Aug. 28 (Bloomberg) -- German business confidence probably fell to the lowest level in almost a year in August after the rising cost of credit clouded the outlook for economic growth, a survey of economists shows.

The Ifo research institute's sentiment index fell to 105.4, the lowest since October 2006, from July's 106.4, according to the median of 36 forecasts in a Bloomberg News survey. The institute will release the figures, based on responses from 7,000 executives, at 10 a.m. in Munich today.

Contagion from the U.S. subprime mortgage debacle raised concern that companies will find it harder to borrow just as the economy of the 13 nations sharing the euro starts to lose momentum. German investor confidence fell to an eight-month low and growth in the region's manufacturing and service industries slowed in August.

``The best in terms of growth is probably behind us,'' said Sandra Petcov, an economist at Lehman Brothers International in London. ``If financial market turbulence were to affect lending, it could certainly have more serious repercussions on the economy.''

Ifo conducted the survey from Aug. 3 to Aug. 27, according to spokesman Andre Kunkel. Responses of about two-thirds of participants reflected the market turmoil, Kunkel said. The U.S. Federal Reserve cut the discount rate, at which it makes direct loans to banks, on Aug. 17 and global stocks rebounded.

Slowing Growth

Growth in the euro region slowed to 0.3 percent in the second quarter, the least since the end of 2004, from a 2006 peak of 0.9 percent. The slowdown was caused in part by the biggest drop in construction in a decade in Germany, Europe's largest economy.

For Europe, credit-market concern deepened Aug. 9 after several banks in the region acknowledged their vulnerability to increasing defaults on U.S. subprime mortgages, those to borrowers with a poor credit history. Landesbank Baden- Wuerttemberg, Germany's largest state-owned bank, on Aug. 27 agreed to buy Landesbank Sachsen Girozentrale after the public lender was bailed out.

European companies were already dealing with a stronger euro, making their goods less competitive abroad, a 17 percent increase in oil prices this year and higher interest rates.

The euro's 17 percent gain against the dollar in less than two years reduced the competitiveness of European exports at the same time as the housing slump curbed growth in the U.S. economy, the world's largest. The euro touched a record $1.3852 July 24.

BMW, Audi

Bayerische Motoren Werke AG, the world's largest luxury carmaker, on Aug. 1 reported a bigger decline in second-quarter profit than analysts had estimated because of the euro's strength. Audi AG, Volkswagen AG's luxury unit, said last month it expects lower earnings, partly because of currency swings.

Still, in its monthly report published Aug. 20, the Bundesbank said financial-market turbulence is ``no reason'' to change its view that the economic outlook is ``still favorable.''

European Central Bank President Jean-Claude Trichet yesterday refused to be drawn on the course of interest rates, saying the bank's council will decide at its Sept. 6 meeting. He didn't repeat his August call for ``strong vigilance'' on inflation, words he used to signal all eight of the bank's increases in the benchmark rate since late 2005. The rate now stands at 4 percent.

M3 money supply, which the ECB uses as a gauge of future inflation, probably accelerated in July, a Bloomberg survey shows. The ECB will release that figure at 10 a.m. today.

``If risk aversion continues to trend lower over the next week or so, then we'll definitely see a 25-basis-point rate increase by the ECB'' next month, said Michael Rottmann, an economist at Unicredit MIB in Munich.

Investors expect the ECB to raise borrowing costs once more this year, futures trading shows. The implied rate on the three- month Euribor contract for December settlement was at 4.42 percent yesterday.

The contracts settle to the three-month inter-bank offered rate for the euro, which has averaged 16 basis points more than the ECB's benchmark rate since the currency's start in 1999.