Grave business - my financial world

Anxiety about a worldwide recession made credit even tighter Friday, as banks and companies opted to hang on to their cash rather than risk lending money out.

With confidence waning, investors poured funds into U.S. Treasurys, hoping to find a safe place for their money.

At one point Friday, the yield on the 30-year bond sank to its lowest level in its 31-year trading history, to as low as 3.87%. Other government bonds also rose, sending the 3-month bill’s yield below 1%.

"People are becoming worried about the economic costs of the credit crisis," said Steve Van Order, chief fixed income strategist at Calvert Funds. "Fears are spreading around the globe."

For the past two weeks, central banks around the globe have attempted to stimulate confidence in investors and financial institutions by encouraging lending. They have taken measures to lower interest rates and directly inject capital into the banking system.

However, signs that economies around the world are sinking into a deep, prolonged recession have renewed worries. The British economy appeared to be on the brink of recession Friday, as economic output in the United Kingdom declined for the first time sine 1992.

Lending: Short-term lending rates rose for the second straight day. The overnight Libor rate edged up to 1.28% from 1.21% the day before, according to Bloomberg.com. Libor is a daily average of what 16 different banks charge other banks to lend money in London.

The overnight bank lending rate had been steadily declining for nearly two weeks from nearly 7% after the signing of the bailout package. Despite its recent rise, it still remains below the rate that federal banks charge other banks - which is generally viewed as an encouraging sign for the credit markets. The federal funds rate stands at 1.5%.

But with central banks taking such an active role in stemming the credit crisis, rates will likely continue their drop.

"Rates will continue to come down, because the central banks’ tools will work," said Van Order. "But the central banks have taken over so much control, that it will require them to stay heavily involved for the long haul in order to achieve overall stability."

Longer-term rates actually fell very slightly, yet lending still remained tight. The 3-month Libor fell to 3.52% from 3.54% on Thursday, according to Bloomberg. The 3-month rate has fallen steadily for two weeks since it surged to just below 5% on Oct. 10 - a 10-month high. The rate was under 3% before the recent credit crisis took hold in mid-September http://payday-z.com.

Market gauges: Two key indicators of risk sentiment showed confidence in the market was falling.

The "TED spread" rose to 2.64 percentage points from 2.53 points Thursday. The TED spread measures the difference between the 3-month Libor and the 3-month Treasury bill, and is a key indicator of risk.

The higher the spread, the more unwilling investors are to take risks. The spread was 1.21 percentage points before the credit crisis and reached a record high of 4.65 points a little more than a week ago.

Another indicator, the Libor-OIS spread, edged higher to 2.61 percentage points from 2.51 points Thursday.

The Libor-OIS spread measures how much cash is available for lending between banks, and is used for determining lending rates. The bigger the spread, the less cash is available for lending.

Treasurys soar: Government debt prices were mostly higher Thursday, as global stocks plummeted. Investors tend to flock to Treasurys in times of economic uncertainty because the safety of lower returns offsets the risks of more lucrative equities.

The benchmark 10-year note rose 2/32 to 102-21/32, and its yield fell to 3.68%. Bond prices and yields move in opposite directions.

The 30-year bond gave up earlier gains to end the day nearly flat from the previous day, at 107-22/32, with a yield of 4.05%. Earlier in the day, prices rallied with the yield dipping below 3.90% for the first time since the 30-year began trading in 1977.

The 2-year note rose 7/32 to 100-31/32, and its yield fell to 1.50% from 1.59% late Thursday.

The yield on the 3-month bill fell to 0.88%, down from 0.94% on Thursday.

The yield on the 3-month Treasury bill is closely watched as an immediate reading on investor confidence. Investors and money-market funds shuffle funds into and out of the 3-month bill frequently, as they assess risk in the rest of the marketplace. A higher yield indicates that investors are slightly more optimistic.

But with so much government action to boost the markets, bonds may not rise much beyond their current levels.

"With all the liquidity injections and moves to prop up the money markets, we’re not going to see yields fall much further," said Van Order. "If you believe the Fed is going to cut rates to 0%, then we could see yields really come down and the 3-month bill around 0%." 

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Recession fears and expectations of sharp interest rate cuts by central banks in Europe sent the dollar soaring against the euro and the pound Friday, but the U.S. currency tumbled against the yen.

The euro fell 1.2% to $1.269 early in the session, but had dropped as much as 3% versus the dollar after the United Kingdom reported the first decline in economic production since 1992.

The British pound also tumbled, collapsing nearly 7% versus the dollar to $1.52, marking the biggest intraday decline since exchange rates became freely floated in 1971. But the pound had recovered by late morning in New York to trade down 1.1% at $1.7583.

Rate cuts on horizon? The British government reported that nation’s gross domestic product, the broad measure of economic activity, fell 0.5% in the third quarter, and British treasury chief Alistair Darling vowed to do what was necessary to support the economy there.

Traders are expecting that the Bank of England and European Central Bank will have to make sharp interest rate cuts in the weeks and months ahead, much steeper than the cuts still available to policymakers with central banks in Japan and the United States.

The key benchmark interest rate of the Bank of Japan is 0.5%, and the U.S. Federal Reserve has already cut its fed funds rate to 1.5%. Meanwhile, the ECB’s benchmark rate stands at 3.75%, while the Bank of England’s rate is 4.5%.

Yen boost: The best performing major currency was the yen, which drove the dollar to a 13-year low of ¥91.10. By late morning in New York, the dollar was trading at ¥93 http://full-free-credit-report.com.18.

The yen was driven higher by equity losses around the globe as investors lost confidence in the world economy. Investors often borrow yen to fund investments in higher-yielding currencies, such as the euro or the pound. When those currencies weaken, and investors reverse their positions, they are forced to buy back the yen, raising its value.

Investors also tend to buy into the yen as a defensive risk-aversion move.

Global stock markets were taking a beating Friday as spooked investors moved quickly to shift assets out of risky equities into perceived safe havens, like the dollar and yen.

"When the stocks are falling across the board and there is a big loss in risk appetite, the dollar rises. So does the the other low yielding currencies like the yen," said Ashraf Laidi, chief foreign exchange strategist for CMC Markets.

"There’s nothing fundamental about any of this," said David Kelly, the chief market strategist for JPMorgan Funds. "What we’re seeing is forced selling by some institutions. One of the ways of looking at what is going on is a mirror image of three to four months ago."

Laidi and Kelly both said those who bet against less expensive currencies like the dollar and the yen earlier this year, seeking higher returns in other currencies, are now forced to unwind those positions. 

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The International Monetary Fund on Wednesday issued a gloomy economic outlook for the United States and the Western Hemisphere, saying U.S. economic growth will be close to zero or even slightly negative for the rest of 2008 and the following few months.

In a new report that uses data from as recent as mid-October, the IMF projects economic recovery in the United States will not begin until the second half of 2009, and will be more gradual than previous recoveries because of the exceptional nature of the asset price adjustments taking place.

In Canada, growth for 2008 will be about 0.3% but is projected to rise to 1.7% for 2009. The report says Canadian banks have weathered the financial crisis fairly well because of more conservative regulation and less reliance on toxic investments.

Overall, the IMF says, growth in the advanced economies as a whole will also be close to zero at least until the middle of 2009.

The IMF now projects a major downturn for the global economy, with growth falling to its slowest pace since the 2001-02 recession as a result of the ongoing credit crisis, along with extremely volatile commodity markets worldwide check cash advance.

The report suggests the massive and increasingly coordinated action of major industrialized countries will ultimately be successful in stabilizing the world economy, but that recovery will not be speedy.

For other areas of the Western Hemisphere, the IMF describes the combination of negative shocks as a "negative feedback loop," meaning that the freeze in global credit markets, weaker external demand, and lower commodity prices are combining to make each of those factors even more painful.

Even with those factors, however, the IMF projects that Latin America and the Caribbean regions will grow at a 3% rate - about average for emerging markets worldwide.

Nevertheless, for countries that have been growing much faster than that, economic conditions will feel much more sluggish. Lower commodity prices will be the significant dampener for these emerging economies that have benefited from higher prices in recent years. 

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The credit markets are showing some tentative signs of defrosting, and shares of several big banks were up Monday morning.

But it’s not all puppies and sunshine in the world of high finance.

Wall Street is turning its gaze to another troubled industry in the financial-services sector: life insurers.

Shares of Prudential Financial (PRU, Fortune 500) sank like - I can’t resist this - a rock on Monday after Goldman Sachs analyst Thomas Cholnoky downgraded the insurance giant to "sell." The stock fell nearly 9% late Monday morning before bouncing back a bit later in the day.

Cholnoky also downgraded shares of MetLife (MET, Fortune 500), to a "neutral" rating. The stock fell about 3% in the morning before rallying in the afternoon. Shares were up about 2% in mid-afternoon trading.

The downgrades initially pushed down the shares of many other life insurers as well. Principal Financial Group (PFG, Fortune 500) was down more than 4% Monday morning but inched slightly higher in the afternoon and Hartford Financial Services (HIG, Fortune 500) sank about 7% in the morning before also climbing into positive territory.

In his note, Cholnoky wrote that "widening credit spreads and a deteriorating mortgage environment are likely to weigh on life insurance company balance sheets for the foreseeable future."

But other analysts who follow the sector said there was not much new news to justify Monday morning’s selloff.

The insurers have already warned of weak results to come, these analysts say, and the stocks have already plunged as a result.

"The companies, for the most part, have reported they expect to take writedowns because of investments in troubled financial services firms whose names we all know," said Steven Schwartz, an insurance analyst with Raymond James.

Randy Binner, an analyst with Friedman Billings Ramsey, agreed, noting that shares of major life insurers are down some 50%. "The most important trend for the group is the credit exposure. But credit has been an issue for the whole year so it would appear to be already priced into stocks," Binner said.

Many of these firms also held stocks and bonds of failed or floundering financial firms, such as Fannie Mae (FNM, Fortune 500), Freddie Mac (FRE, Fortune 500), Lehman Brothers, Washington Mutual and AIG (AIG, Fortune 500).

The life insurers have been hit hard by their bad bets. And some have been forced to raise more capital. MetLife announced earlier this month that it planned to sell about $2 billion’s worth of stock while Hartford is receiving a $2.5 billion investment from German financial firm Allianz payday advances.

One analyst points out that investors seem to be worried that the life insurers will need even more cash to ensure that credit-rating firms like Moody’s and Standard & Poor’s don’t downgrade their debt.

"There are concerns over capital raising and questions over whether current levels are sufficient to maintain rating agency ratings and weather the current crisis," said Mark Finkelstein, an analyst with Fox-Pitt Kelton Cochran Caronia Waller.

"The rating agencies do appear to be putting more scrutiny on the group," Finkelstein added.

Still, Binner thinks that several of the insurer stocks, particularly MetLife and Prudential, have been dramatically oversold. And Schwartz said that despite the problems facing many life insurers, he did not expect any of them to fail or wind up in bankruptcy.

That remark appeared to be a jab at Senate Majority Leader Harry Reid (D-Nev.), who helped spark a sector-wide selloff earlier this month after cavalierly suggesting that a major insurer was on the verge of going bankrupt if Congress did not act to pass the bank bailout bill.

If anything, Schwartz said that life insurers might seek to take advantage of the turmoil in the sector and scoop up parts of AIG, which is expected to sell off many assets to pay off the $85 billion it borrowed from the Federal Reserve.

AIG bought SunAmerica in 1998 and American General in 2001, for example, and Schwartz said they both have "attractive life insurance policies."

Binner added that he also wouldn’t be surprised if the big life insurers wind up purchasing parts of AIG. In addition, he said there may even be some big mergers as well. As such, there were reports a few weeks ago that indicated MetLife and Hartford held some preliminary merger talks.

"These companies’ main businesses are life insurance and annuities. They are all consumer focused so it makes sense to have economies of scale," he said.

But Schwartz isn’t as sure that huge deals are in the cards. He conceded that a merger could lead to greater efficiencies at a time when cutting costs is paramount.

However, raising capital is the biggest concern right now for most insurers. So a combination of two companies that each face that challenge might not make sense.

"I’m not sure what merging two insurers does to shore up their balance sheets. If there are two holes, there’s going to be one hole that’s going to be bigger," he said.  

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Stock prices have plunged in recent weeks. So have oil prices.

Most Americans probably see the former as terrible news and the latter as a ray of sunshine at a dark time.

But both could contribute to a growing concern among economists - deflation.

Simply put, deflation is the opposite of inflation: It’s when prices for a wide range of products start falling, rather than rising.

And while consumers struggling with the high cost of gas and food might think the idea of deflation sounds attractive, economists almost universally agree that it would be very bad news.

"When prices start to fall because of lack of demand, they can go well below the cost it takes to produce products," said Bernard Baumohl, executive director of the Economic Outlook Group. "Companies have no alternative than to cut back production and lay off a lot of workers. That cuts demand more. You get this vicious downward spiral in prices."

Most economists point out that the current economic conditions do not yet suggest that deflation is present, or even imminent.

The Consumer Price Index, the government’s key inflation measure, did show no rise in prices in September. But prices are still up 4.5% over the past 12 months.

Baumohl puts the risk of deflation about 10% to 15%, and no more than 20%. But he said only a month ago he would have thought the risk of deflation was less than 5%.

The credit market crisis, combined with the recent stock market declines and the plunge in home values over the past two years, is setting off the deflationary alarm bells for economists.

Paul Kasriel, chief economist with Northern Trust in Chicago, said most bouts of deflation have started with sharp declines in assets such as stocks or homes. That has tended to lead to a loss of value of collateral for loans and ultimately, large losses by lenders and very tight credit.

"I still don’t think deflation is going to happen," said Kasriel, who puts the chance at between 10% and 30%. "But these are the initial conditions that lead to it."

In the United States, the worst period of deflation was the Great Depression.

While a recent CNN poll found 59% of Americans thinking that another depression is likely, most economists dismiss the threat of a depression. But they say deflation is something that gets them worried. And they are very careful using the word cash advance loan.

This week, San Francisco Federal Reserve Bank President Janet Yellen broke a taboo among Fed officials when she said in a speech that the economy "appears to be in a recession."

But in the same speech, she was reluctant to use the word deflation, even though she danced around the concept. She said falling commodity prices, job losses and weak demand for products were likely to "push inflation down to, and possibly even below, rates … consistent with price stability."

Her reluctance to say deflation, even in a speech notable for the use of the word recession, doesn’t surprise economists.

"Deflation is very scary, scarier than a recession, because once you get into it, it’s hard to get out of," said David Wyss, chief economist for Standard & Poor’s.

Wyss said deflation doesn’t have to lead to a 1930s style depression, with double-digit declines in economic activity and unemployment of 25%.

But it can lead to the kind of extended economic pain seen in Japan’s so-called "lost decade," a period that left Japan with little economic growth from the early 1990s until the middle of this decade.

"The Japanese had deflation during their lost decade when their banks were unable to create credit," said Kasriel.

The Fed’s attention to the rising threat of deflation is encouraging, Kasriel said. The central bank has pumped hundreds of billions of dollars into the financial system to try to spur lending and support spending and prices.

This is a sign that inflation is no longer a concern for many Fed policymakers.

"It maybe premature to worry about deflation but it’s long past the time to talk about inflation," Wyss said.

Kasriel added that American consumers should be concerned about deflation as well - even if lower prices sound like a good "problem."

"Sure, you feel like you’re on top of the world when you pay less than $3 for gas," Kasriel said. "But it’s not because we’ve discovered new oil reserves. It’s because demand is very weak. It’s a symptom of a global recession rather than a cause for hope of a quick recovery in the economy." 

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Morgan Stanley is engaged in high-stakes talks with a big Japanese bank over a multi-billion capital investment in the embattled Wall Street bank, according to an online report Sunday.

Morgan and Mitsubishi UFJ Financial Group were renegotiating the terms of a proposed $9 billion stock purchase, the New York Times reported, citing sources.

According to the Times, Mitsubishi wanted better terms since Morgan’s market value has plummeted. Under the new terms, Mitsubishi would still buy 21% of Morgan but in the form of preferred shares that pay a 10% annual dividend. The firms have been in contact with officials of both governments.

The U.S. Treasury Department, as part of its response to the growing financial crisis, is poised to start implementing a $700 billion bailout plan that may involve direct equity investments in banks. Treasury is not planning on making such an investment in Morgan, according to the Times.

Both firms denied comment to the Times.

Last week, Morgan denied rumors that the deal was falling apart because of a dramatic drop in its stock price as investors grew wary of the firm’s prospects. Mitsubishi’s $9 billion investment is considered to be a life-saving deal for Morgan Stanley no teletrek payday advance.

Shares of Morgan (MS, Fortune 500) plummeted 22% on Friday on news that rating agency Moody’s was weighing a potential downgrade of the long-term debt ratings of the company and its subsidiaries. At one point, shares fell as much as 46%.

Still, despite several reassurances from Morgan Stanley and Mitsubishi that the deal would close as scheduled next week, investors remained jittery about Morgan’s fate.

Morgan Stanley and its Wall Street rival Goldman Sachs (GS, Fortune 500) have both been hit hard in the past month or so. The credit crisis already has led to the bankruptcy of Lehman Brothers as well as the sale of another prominent investment bank, Merrill Lynch (MER, Fortune 500), to Bank of America (BAC, Fortune 500). In the wake of the market meltdown, both Morgan and Goldman asked the Federal Reserve last month to be reclassified as bank holding companies. The Fed agreed to the request, which means the two firms are allowed to create commercial banking operations that can take deposits. This move should help Morgan and Goldman raise more capital.  

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Predicting a bottom for the U.S. stock market has been a thankless task in recent days, with indicators that typically signal the end of selling pressure yielding little help.

The three major U.S. stock indexes are each down around 40 percent for the year so far. But analysts said the bottom may be a long ways off as fear eclipses technical indicators.

After a precipitous eight-day slide for the broader market through Friday, there remained a growing discord among market technicians and analysts as to whether the market has seen its worst days or not.

In Friday’s wildly volatile session, the Dow Jones industrial average .DJI swung 1,000 points for the first time ever between its intraday high and low. The Dow briefly dropped below 8,000 for the first time since April 1, 2003, and then rallied over 300 points late in the day — only to give up those gains and close down 128 points at 8,451.19.

Volume was exceptionally heavy, with 2.95 billion shares changing hands on Friday on the New York Stock Exchange — the highest NYSE volume ever for a day that doesn’t include the quarterly expiration of stock-index futures and options, according to a blog posting by Ray Pellecchia on NYSE Euronext’s Web site. In comparison, last year’s daily average was 1.90 billion shares.

In one sign of just how unsettled the stock market has become, investors clamored for a coordinated interest-rate cut by the U.S. Federal Reserve and other central banks. But when the central banks gave the market what it wanted, stock investors still were driven by a heightened sense of fear.

Even though selling volume exploded, it is not providing clear-cut signals that the market is near some turning point or that the sellers will soon get exhausted, said Cleveland Rueckert, market analyst at Birinyi Associates Inc in Stamford, Connecticut.

“There’s nothing that you can put a finger on and then say this one thing has changed, now you have the bottom,” he told Reuters. “People are worried about earnings right now — the prospect of a deep recession. Nobody wants to own stocks.” 

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Gasoline prices fell more than 4 cents a gallon Thursday, according to a daily survey, as the economic crisis continues to weigh on consumer demand.

The average price of unleaded regular fell to $3.403 a gallon nationwide, down 4.4 cents from $3.447 Wednesday, according to the Daily Fuel Gauge Report issued by motorist group AAA.

The price has tumbled more than 71 cents, more than 17% below the record $4.114 set July 17. It’s down nearly 25 cents from a month ago, but up almost 64 cents from a year earlier.

The average price fell below $3 a gallon in Oklahoma, where it is now $2 (faxless payday loan guaranteed).987. Oklahoma is the only state below $3, with Kansas closest at $3.034.

Gasoline is highest in Alaska, at $4.165 a gallon, with Hawaii - at $4.107 - the only other state above $4 a gallon.

The survey is conducted for AAA by Oil Price Information Service from credit card swipes at more than 85,000 service stations nationwide. 

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Industrial production in Germany, Europe's largest economy, rose the most in 15 years in August led by demand for construction.

Output gained a seasonally adjusted 3.4 percent from July, when it slipped 1.6 percent, the Economy Ministry in Berlin said today. That's the biggest gain since August 1993. Economists expected a drop of 0.3 percent, the median of 27 forecasts in a Bloomberg News survey showed. From a year earlier, production adjusted for working days rose 1.7 percent.

The German economy has shown few signs of recovery after shrinking in the second quarter as worsening financial market turmoil pushes up credit costs and weighs on global growth. Still, factory orders rose for the first time in nine months in August and investors were more optimistic last month.

“It wasn't much of a surprise after factory orders,'' said Sylvain Broyer, an economist at Natixis in Frankfurt. “We're only at the beginning of a slowdown. The German economy will fail to grow over the coming one or two quarters.''

Factory orders rose for the first time in nine months in August, data showed yesterday, ending their longest-ever losing streak. The August gain in industrial production is distorted because of the summer holidays, the Economy Ministry said today.

Billions Injected

Banks have recorded almost $600 billion in writedowns and losses tied to the U.S. mortgage market since the start of 2007, forcing the European Central Bank and its counterparts around the world to inject billions into the banking system.

The world's major banks need $675 billion in fresh capital over the next several years to recover from the credit crisis, the International Monetary Fund in Washington said yesterday.

The yearlong credit crunch is already feeding into the economy. German business confidence declined more than expected to the lowest level in more than three years in September and investor sentiment is still close to an all-time low.

The IMF will cut its global growth forecast “pretty significantly'' this month, Managing Director Dominique Strauss- Kahn said on Oct. 4. The European Commission last month already lowered its forecast for the euro-area economy this year and said Germany will slip into a recession (pay day loans).

Gasping

“This is just a breather in a downward trend,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt in an e- mailed note. He expects the German economy to shrink 0.2 percent in the third quarter after contracting 0.5 percent in the second.

General Motors Corp.'s German brand Adam Opel said yesterday it will halt production for three weeks at its plant in Eisenach from next week as the turmoil hurts demand, while another Opel factory in Bochum is completing a two-week closure. Siemens AG, Europe's largest engineering company, plans to book 3 billion euros ($4.1 billion) in costs such as to cut jobs.

“The situation remains challenging,'' Bayerische Motoren Werke AG, the world's largest maker of luxury cars based in Munich, said in a statement today. “The recent escalation in the financial crisis is also affecting consumer confidence in the premium segment.''

Germany's DAX benchmark index has shed 20 percent over the past month, bringing declines to almost 38 percent this year.

Still, oil prices have retreated more than 40 percent from a record of $147.27 a barrel on July 11, leaving companies and consumers with more money to spend. The euro has shed 9 percent against the dollar over the past two months, making exports more competitive in the world's largest economy.

Construction output rose 5.5 percent in August from the previous month and production of investment goods increased 3.9 percent, today's report showed. Output of consumer goods rose 3 percent with production of durable goods surging 8.7 percent. Manufacturing output excluding construction rose 3.2 percent.

Some German companies are still confident on earnings. Porsche SE, the maker of the 911 sports car, said on Oct. 2 it expects “very good'' full-year earnings and a rebound in U.S. sales over coming months.

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Australia's central bank cut its benchmark interest rate by one percentage point, the biggest reduction since a recession in 1992, to cushion the nation's economy against fallout from a global credit freeze.

Stocks rose after Governor Glenn Stevens and his board lowered the overnight cash rate target to 6 percent from 7 percent in Sydney today. “An unusually large movement in the cash rate was appropriate in order to bring about a significant reduction in costs to borrowers,'' Stevens said.

Turmoil on financial markets combined with a drop in consumer spending and home borrowing has prompted Stevens to reduce the benchmark rate and buttress an economy that grew at the slowest pace in more than three years in the second quarter. The global credit-market squeeze has also driven up the cost of funding, suggesting lenders may not pass on all of today's reduction to borrowers.

“The recent deterioration in prospects for global growth, together with much more difficult market conditions even for creditworthy borrowers, now present the risk that demand and output could be significantly weaker than earlier forecast.'' Stevens said in a statement.

Australia's S&P/ASX 200 Index of stocks added 1 percent to 4,584.8 at 2:47 p.m. in Sydney, reversing a drop of 0.5 percent immediately before the Reserve Bank of Australia's decision. The index has lost almost a third of its value this year amid a credit freeze triggered by the U.S. subprime mortgage crisis.

Currency Moves

The Australian dollar initially fell before rising to 72.29 U.S. cents at 2:52 p.m. in Sydney from 72.06 cents before the decision was announced. The currency has tumbled 28 percent since hitting a 25-year high of 98.49 cents on July 16.

The bank's cut today came after stocks tumbled around the world, the euro fell the most against the yen since its debut and oil dropped below $90 a barrel as concerns about a global slowdown overshadowed the $700 billion U.S. Treasury plan to revive credit markets.

The Reserve Bank cut the benchmark interest rate by a quarter point a month ago after pushing borrowing costs to a 12- year high with a dozen similar increases between May 2002 and March this year.

Concern that domestic demand “could weaken more sharply than necessary'' was a key reason Stevens reduced the rate on Sept (fast cash). 2, even after inflation accelerated above his target range of between 2 percent and 3 percent.

Economic Growth

Households cut spending in the three months through June this year for the first time since 1993, causing quarterly gross domestic product to expand just 0.3 percent, the slowest pace since the fourth quarter of 2004.

Home-buyers have also become less willing to borrow after companies such as Qantas Airways Ltd. and Ford Motor Co. announced job cuts. Banks have taken “a more cautious attitude to lending'' and tripled provisions for bad debts, according to a Reserve Bank report last month.

Credit provided by banks and financial institutions to home buyers rose 0.4 percent in August, the smallest monthly increase in 22 years, and house-building approvals fell for a second month.

A Westpac Banking Corp. gauge of consumer confidence showed pessimists outnumbered optimists in September for an eighth month. August business sentiment was close to a seven-year low.

Speculation that Stevens would cut the benchmark rate by a half point surged last week after the global credit squeeze drove up the cost of funding for banks and hampered their ability to pass on official rate reductions in full.

Home Loans

A percentage point reduction in mortgage rates would reduce the repayments on an average A$250,000 ($181,000) home loan by almost A$200 a month, according to the Real Estate Institute.

“The recent evolution of the credit crisis presents a serious threat to the Australian economy,'' Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney, said ahead of today's decision. “The Reserve Bank's easing cycle is likely to step up a gear.''

Waning consumer spending and confidence is being partially offset by a China-driven mining boom. Soaring coal and iron ore exports helped generate a trade surplus in August of A$1.36 billion, the second-largest windfall on record.

Inflation accelerated to 4.5 percent in the second quarter and is forecast by the central bank to peak at 5 percent later this year before slowing back within the bank's target range in 2010.

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