BBC News - IMF head Christine Lagarde warns of deflation risks

The head of the International Monetary Fund has warned about the risks to global economic recovery of deflation.

Christine Lagarde was speaking at the National Press Club, in Washington

Christine Lagarde said that "optimism is in the air" about growth, but the recovery is still "fragile".

"If inflation is the genie, then deflation is the ogre that must be fought decisively," she said in a speech in Washington.

Earlier, the World Bank said that the global economy was at a "turning point" but "remained vulnerable".

"We see rising risks of deflation, which could prove disastrous for the recovery," Ms Lagarde said at the National Press.

There has, for example, been growing debate about whether deflation might take hold in the eurozone, where inflation remains persistently below the European Central Bank's target.

Deflation can reduce personal consumption as people wait for prices to fall further, and discourage investment because it can raise the real cost of borrowing.

Ms Lagarde also warned about the volatility that could accompany the US Federal Reserve's gradual withdrawal of monetary stimulus.

"Overall, the direction is positive, but global growth is still too low, too fragile, and too uneven," she said.

Also on Wednesday, the World Bank said in its annual report that richer countries appeared to be "finally turning a corner" after the financial crisis.

That is expected to support stronger growth in developing economies.

But it warned growth prospects "remained vulnerable" to the impact of the withdrawal of economic stimulus measures in the US.

'Crisis risks'

The US Federal Reserve has already begun to wind down its monthly bond-buying programme, previously set at $85bn (£52bn) a month.

There is concern this could push up global interest rates, which could affect the flow of money in and out of developing countries and lead to more volatile international financial markets.

The World Bank warned that some developing countries "could face crisis risks" if the unwinding of stimulus measures was accompanied by market volatility.

"Growth appears to be strengthening in both high-income and developing countries, but downside risks continue to threaten the global economic recovery," said World Bank group president Jim Yong Kim.

"The performance of advanced economies is gaining momentum, and this should support stronger growth in developing countries in the months ahead. Still, to accelerate poverty reduction, developing nations will need to adopt structural reforms that promote job creation, strengthen financial systems, and shore up social safety nets."

The bank forecasts that global GDP will grow by 3.2% this year, up from 2.4% in 2013, with much of the pick-up coming from developed economies.

Developing nations will grow by 5.3% this year, up from 4.8% in 2013.

In an interview with BBC economics correspondent Andrew Walker, World Bank economist Andrew Burns acknowledged that Brazil, Turkey, India and Indonesia were among the countries that could be vulnerable to the impact of US stimulus withdrawal.

However he also noted that the first concrete steps taken by the Federal Reserve to cut back its programme of buying financial assets last month did not severely disturb the markets.

Reuters News - Lawmakers unveil $1.1 trillion spending bill

The U.S. Capitol dome is pictured in the pre-dawn darkness in this general view taken in Washington, October 18, 2013.

CREDIT: REUTERS/JONATHAN ERNST

(Reuters) - Negotiators in the U.S. Congress on Monday unveiled a $1.1 trillion spending bill that aims to prevent another government shutdown while boosting funding levels slightly for military and domestic programs - but not for "Obamacare" health reforms.

With a deadline looming at midnight Wednesday for new spending authority, lawmakers will still need a three-day stop-gap funding extension to ensure enough time for passage of the spending bill this week.

The measure eases across-the-board spending cuts by providing an extra $45 billion for military and domestic discretionary programs for fiscal 2014, to a total of $1.012 trillion. It also provides an additional $85.2 billion for Afghanistan war funding that is typically handled off-budget.

The spending measure fills in the details of a budget agreement passed in December in the aftermath of a 16-day shutdown of many government agencies in October. The shutdown was prompted largely by disputes over funding for "Obamacare" health insurance reforms.

Although many programs will get a slight increase over 2013 levels and avoid steep cuts previously slated for this year, the proposed bill does not provide any increase for implementation of the Affordable Care Act, President Barack Obama's signature healthcare reform law.

According to a House Republican summary, a public health fund will be reduced by $1 billion to prevent Health and Human Services Secretary Kathleen Sebelius from "raiding" these funds to spend on Obamacare insurance exchanges.

The chairs of the Senate and House of Representatives Appropriations Committees said in a joint statement that the deal will eliminate the economic instability caused by Congress' recent funding battles.

"As with any compromise, not everyone will like everything in this bill, but in this divided government a critical bill such as this simply cannot reflect the wants of only one party," Democratic Senator Barbara Mikulski of Maryland and Republican Representative Harold Rogers of Kentucky said in a statement.

White House Budget Director Sylvia Mathews Burwell said the measure will help fund critical investments in education and infrastructure.

"This legislation adheres to the funding levels in the budget agreement enacted in December, unwinds some of the damaging cuts caused by sequestration," she said in a statement.

The military avoids about $22 billion in the across-the-board cuts, with total non-war spending of about $520.5 billion under the bill, while agencies focused on domestic programs will get $491.8 billion, representing an increase of about $22 billion over sequester levels.

But some controversial budget items took a hit. The spending measure provides no funds for high-speed rail projects, and it again denied a funding transfer needed to pay for critical reforms to the International Monetary Fund.

MILITARY PENSION FIX

But both Republicans and Democrats touted a provision in the bill that reverses planned military pension cuts for disabled veterans, a controversial part of the December budget deal that helped pay for about $6 billion in new spending. Military retirees of working age were to see smaller cost-of-living increases in their pensions starting in 2015 but it was later discovered that the change was inadvertently applied to disabled veterans and survivors of deceased veterans as well.

While the spending bill will reverse the cuts for disabled veterans and survivors, many Republicans in Congress still want to cancel the cuts for all retired military service members.

Negotiations on the measure bogged down as lawmakers attempted to attach policy provisions on issues ranging from restricting abortions to curtailing regulation of carbon emissions. Many of these were successfully fought off, including new abortion provisions, Mikulski told reporters.

Democratic aides said the bill includes no new provisions prohibiting regulations on greenhouse gas emissions, nor forestry and stream management. They also prevented new gun-rights language from inclusion.

But Republicans did get a policy provision into the measure that prohibits funding of the Obama administration's "light bulb standard," which prohibits the manufacture of incandescent light bulbs in favor of newer technologies that reduce energy consumption.

Passage of the measure would leave just one more significant fiscal policy hurdle during the current fiscal year which ends on September 30 - an increase in the federal debt limit. This will likely be needed by March or April to avoid a default on the Treasury's debt and the resulting market turmoil.

(Editing by Lisa Shumaker and Eric Walsh)

Reuters News - UK confirms debt pledge ahead of Scottish referendum

The Saltire (R) and Union Flag fly together in a street before a debate in the Scottish Parliament on ‘Scotland’s future,’ in Edinburgh, Scotland September 18, 2013.

CREDIT: REUTERS/RUSSELL CHEYNE

(Reuters) - The British government confirmed on Monday that it will take responsibility for all British government debt should Scotland vote for independence in September, a move it hopes will avoid jitters in bond markets ahead of the referendum.

"In the event of Scottish independence from the United Kingdom, the continuing UK government would in all circumstances honor the contractual terms of the debt issued by the UK government," the Treasury said in a statement.

An independent Scotland would be responsible for "a fair and proportionate share" of Britain's liabilities but a share of the outstanding debt would not be transferred to Scotland, it said, adding the terms of repayment would be subject to negotiation.

Britain's net debt stood at nearly 1.2 trillion pounds at the end of the 2012-13 fiscal year.

(Reporting by William Schomberg, Editing by Belinda Goldsmith)

Bloomberg News - Greece Dreams of Bond Sale in Rally From Ireland to Portugal

Europe’s financial markets are picking up where they left off 2013, extending a rally in bonds and stocks that’s making the region’s sovereign debt crisis little more than a fading memory.

Ireland sold bonds this week, returning to financial markets after completing a three-year bailout program. Portugal -- another aid recipient -- is holding a sale today. Banks in Spain and other periphery countries have never been able to borrow as cheaply as they can now. The Stoxx Europe 600 Index of stocks closed at its highest level since May 2008 yesterday and the euro is about its strongest since 2011 against the dollar.

Such is the confidence in Europe thatGreece, which sparked Europe’s sovereign woes in 2009 and required two bailouts, said yesterday it may sell bonds this year. That would mark a turnaround in the region after nations were shut out of debt markets, triggering the collapse of governments and causing unemployment to top 12 percent. It took a pledge from European Central Bank President Mario Draghi in July 2012 to “do whatever it takes” to keep the currency bloc from breaking apart.

“The market is feeling very confident,” said Daniel Loughney, a fixed-income money manager inLondon at AllianceBernstein Holding LP, which oversees $446 billion. “They know the ECB will want to support them. It’s in everyone’s interest not to upset the apple cart.”

BlackRock, Templeton

Last year’s rally, led by a 47 percent return in Greek bonds, rewarded investors from BlackRock Inc. to Franklin Templeton Investors who took a chance on the region’s financial assets. Sovereign debt yields in the euro area fell to 2.55 percent on average this week, lower even than before the global financial crisis, Bank of America Merrill Lynch indexes show.

That’s a reversal from late 2011, when borrowing costs soared to almost 10 percent as governments sought international bailouts because they lost access to debt markets. The crisis had worldwide repercussions, with MF Global Holdings Ltd., the New York firm led by Jon Corzine, collapsing when the extent of its bets on European debt became known.

Investor appetite for European government bonds is returning as the region’s most-indebted peripheral economies show signs of recovery. Ireland, which had its fastest growth since 2011 in the third quarter, raised 3.75 billion euros ($5.1 billion) from a 10-year bond sale this week as it came back to financial markets after exiting its bailout program.

Falling Yields

Yields on Ireland’s benchmark 10-year bonds fell as low as 3.25 percent on Jan. 7, the least since January 2006. The extra yield investors receive for holding the securities instead of benchmark German bunds narrowed to 1.35 percentage points from a high of more than 11.5 percentage points on July 2011.

Portugal is now trying to regain full access to debt markets, with the end of its own 78 billion-euro rescue program from the European Union and International Monetary Fund approaching in June. The nation will sell additional 4.75 percent securities maturing in June 2019 priced to yield 330 basis points more than the mid-swap rate, said a person familiar with the arrangement, who asked not to be identified because they’re not authorized to speak about it. That’s down from initial price talk of about 340 basis points.

The rate on 4.45 percent Portuguese securities due in June 2018 was at 3.99 percent at 12:49 p.m. London time today, after dropping to 3.91 percent yesterday, the lowest for a benchmark five-year note since 2010.

Sluggish Growth

Spain auctioned five-year notes today to yield 2.382 percent, the lowest on record. The nation’stwo-year note yields fell below 1 percent for the first time on record in secondary-market trading today.

“We’ve seen a meaningful tightening in the periphery and it feels as though that trade still has further to run,” said Mark Dowding, a money manager at London-based BlueBay Asset Management LLP, which oversees $56 billion including Portuguese, Spanish and Italian bonds. “Generally we are playing the periphery from the long-side.” A long position is a bet an asset price will rise.

Europe isn’t in the clear yet. The euro zone’s economy will probably grow 1 percent this year, compared with 2.6 percent for the U.S., according to surveys of analysts by Bloomberg News. The jobless rate has climbed to about 12 percent from 7.3 percent in 2008.

‘Risk Perception’

“In the last 24 months there has been a progressive reduction in the perception of risk among investors and we are gradually moving from fear to greed,” said Jacopo Ceccatelli, a London-based partner who manages 2.2 billion euros at financial advisory and asset management firm JCI Capital. “The reduction in the risk perception, and this sort of market euphoria, is leading to a re-rating of sectors and countries most penalized during the sovereign debt crisis.”

The euro, now the currency for 18 nations, rose against all but one of its 16 major counterparts last year as the region’s economy emerged from its longest recession on record. It rose 0.3 percent to $1.3613 today, after touching a two-year high of $1.3893 on Dec. 27.

As investor confidence builds, corporate credit risk in the euro region is falling. The Markit iTraxx Europe index of credit-default swaps dropped this week to the lowest since January 2010, while the Markit iTraxx Crossover Index of swaps on high-yield companies declined to the lowest since 2007.

Borrowing Costs

In the bond market, banks are paying less to borrow than industrial companies, with average yields about 4.5 basis points lower than the broader market. That’s down from a premium of as much as 70 basis points in November 2011, Bloomberg data show.

The average yield investors demand to hold bonds from financial companies in Spain and other nations from Europe’s periphery dropped nine basis points in the past week to a record 2.62 percent, based on Bank of America Merrill Lynch indexes.

“We’ve seen increased interest in Europe out of the U.S. as people play the recovery story in Europe, and the European periphery in particular,” said Michael Hampden-Turner, an analyst at Citigroup Inc. in London. “Everybody’s pretty long and risk appetite remains strong.”

Europe’s lenders are among those benefiting from the rally in sovereign bonds, through their ownership of the securities. Banks in the Stoxx 600 index jumped 2.9 percent on Jan. 7, the most since July, as Ireland returned to the market.

Spanish Banks

Spanish and Portuguese banks have posted some of the largest increases among European shares this year. Banco Popular Espanol SA rallied 23 percent through yesterday, the most in the Stoxx 600, and Lisbon’s Banco Espirito Santo SA jumped 16 percent. Bank of Ireland Plc climbed 15 percent. Among the 10 biggest winners in the Stoxx 600, five were banks, data compiled by Bloomberg show.

Italian banks, which bought government bonds with three-year loans they obtained from the ECB in 2011 and 2012, are the biggest holders of the country’s sovereign debt.

Banca Monte dei Paschi di Siena SpA, Italy’s biggest holder of Italian bonds relative to its tangible equity, climbed 6.3 percent this year. The Italian bailed-out bank holds 26 billion euros in government bonds, more than three times its tangible capital. UniCredit SpA has jumped 10 percent.

“There’s clearly a recovery trade going on,” said Robert Smalley, Global Financials Analyst and head of the credit desk analyst group at UBS AG in New York. “European banks have been operating a self-help policy in preparation for the asset quality review.”

Draghi’s Pledge

The availability of funding is giving companies with excessive debt loads more time to restructure. Leveraged loan issuance in Europe surged 44 percent last year, with companies borrowing 56 billion euros of the debt, the most since 2007, according to data compiled by Bloomberg.

Billionaires Bill Gates and George Soros have bought stakes in Fomento de Construcciones y Contratas SA, the money-losing Spanish builder that said in November it has about 6 billion euros of debt. The company said yesterday that 95 percent of its lenders agreed to extend its loans for two months as it works to refinance the debt.

The rally’s roots can be traced to July 26, 2012, when Draghi pledged to do “whatever it takes” to protect the region from the unfolding debt crisis. The ECB went on to cut its benchmark interest rate to a record 0.25 percent in November to support the recovery. Policy makers held it at that level today, matching the forecasts of all 51 analysts surveyed by Bloomberg.

Greek Profit

Buying Greek bonds the day of Draghi’s comments would have earned investors a 370 percent return, based on the Bloomberg Greece Sovereign Bond Index. (BGRE) Ireland’s earned 27 percent and Portugal’s 42 percent, while U.S. Treasuries lost 3.9 percent.

BlackRock, the world’s biggest money manager, is betting on more gains. The firm said last month it supported peripheral bonds with positions in Portugal, Slovenia, Ireland and Italy. Franklin Templeton is one of the biggest holders of Irish debt, according to data compiled by Bloomberg.

Buoyed by the recovery in debt markets and with his government predicting Greece will return to growth this year for the first time since 2007, Greek Finance Minister Yannis Stournaras said yesterday the nation may sell five-year notes in the second half of the year.

The step would mark Greece’s return to bond markets since being shut out in early 2010 following alarm about the size of its budget deficit. Yields on the nation’s 10-year debt fell as low as 7.63 percent yesterday, the least since May 2010, and down from a peak of more than 44 percent in March 2012.

“People are generally upbeat and are looking toward further spread tightening,” said AllianceBernstein’s Loughney. “Fundamentally there are still significant issues but it looks as though the ECB’s friendly stance will continue for the foreseeable future.”

By Neal Armstrong and David Goodman

BBC News - China plans new privately financed banks

Up to five private banks will be created in China this year as it looks to open up the financial sector and raise competition in the industry.

China has been looking to loosen its grip on the financial sector

The banks will be allowed to operate on a trial basis under the supervision of Chinese banking authorities.

Private finance will be used to either restructure existing banks or set up new ones "bearing their own risks".

China has been looking to open up its tightly-controlled financial sector to spur a fresh wave of economic growth.

"Strict procedures and standards will be set for the pilots, with demanding set-up criteria, limited licenses, enhanced supervision and a risk handling system," China Banking Regulatory Commission (CBRC) was quoted as saying by the state-owned Xinhua news agency.

The CBRC also said that it would explore lowering the threshold for foreign banks to enter the industry.

Shadow banking rules

The move by China also comes at a time of growing concerns over the rise of shadow banking in the country.

Over the past few years lending by non-banking companies has grown rapidly in China, fuelling a surge in debt levels in the world's second-largest economy.

Critics have argued that shadow banking poses a major risk to China's economic growth and also makes credit less transparent.

Prompted by these concerns, Chinese policymakers have drawn up new regulations for the sector.

The draft rules have not been publicly released, but various media reports indicated they have called for greater supervision and monitoring of the shadow banks.

However, the document proposing the rules said that shadow banking had also benefited the economy.

"The emergence of shadow banks is an inevitable result of financial development and innovation," the Financial Times quoted the document as saying.

"As a complement to the traditional banking system, shadow banks play a positive role in serving the real economy and enriching investment channels for ordinary citizens."

The document stated that at present the country's "shadow banking risks are under control overall".

But it added that "as the 2008 global financial crisis demonstrated, shadow banking risks are complex and hidden, and vulnerabilities can emerge suddenly and spread easily causing systemic problems".

'Support banking reform'

Faced with a slowdown in its growth rate, Beijing has been looking to loosen its grip on the financial and capital markets.

Many analysts have said that opening up the sectors is key to China's future growth.

In December, China's central bank said it will allow banks to trade deposits with each other, using a financial product called certificates of deposit.

The interest rate on the certificates will be determined by the market, unlike ordinary deposits, which are subject to rate caps in China.

The central bank also scrapped the lower limit on lending rates offered by financial institutions last year, a key step towards liberalising interest rates.

In September, China launched a free-trade zone in Shanghai where controls on key sectors will be eased. Measures to be trialled inside the zone include market-driven interest rates.

On Monday, the banking regulator said "more policies will be issued to support banking reform in the Shanghai free trade zone".

Bloomberg News - Central Banks Split on Stimulus in 2014 as Fed Tapers

The united stimulus front of central banks is starting to splinter as 2014 dawns.

The Federal Reserve -- soon to be led byJanet Yellen, who is poised for confirmation by the Senate today -- begins pulling back on its quantitative easing amid stronger U.S. growth, and the Bank of England is trying to cool its housing market. The European Central Bank and Bank of Japan lean toward more monetary action to fight weak inflation. The ECB and BOE both hold policy meetings this week.

The erosion of the mostly synchronized stimulus that supported the world economy for the past six years has investors anticipating a stronger U.S. dollar and weaker Treasuries. That’s not to say the era of easy money is over, as the need to guard against deflation -- as well as the fear of unsettling markets or upending economic expansion -- leaves the Fed and its counterparts pledging to keep interest rates at record lows.

“The world’s main central banks have very different things going on, which is an opportunity for investors,” said Scott Thiel, London-based head of the global bond team at BlackRock Inc., the world’s biggest money manager. “It’s very important to look at the economies close to inflection points on monetary policy.”

Thiel predicted last month that investors will see the Fed’s decision to taper its $85 billion in monthly bond purchases as the beginning of the end of central-bank support and will push the U.S. 10-year note toward 3.25 percent by the end of this year from 3 percent at 5 p.m. in New YorkJan. 3, outpacing the projected rise in Germany’s 10-year bund yield.

Higher Dollar

Higher borrowing costs on U.S. sovereign debt and the improving economy will help boost the dollar this year, said Stephen Jen, co-founder of London-based SLJ Macro Partners LLP. The Bloomberg Dollar Spot Index, which tracks the performance of the currency against a basket of 10 peers, rose about 3.5 percent last year.

“Policy paths will be dictated by diverging economic trajectories,” said Jen, who describes himself as “generally bullish” on the dollar. “Partly because of the Fed having launched multiple rounds of QE, the dollar is now very cheap.”

Signs that the world’s largest economy is strengthening may be enough to rally equities in the U.S. and abroad, said Pierre LaPointe, head of global strategy and research at Pavilion Global Markets Ltd. in Montreal. His research shows that shifts in U.S. equities explained about 40 percent of the moves in German and U.K. stocks since 2000.

Gravitational Pull

“As major central banks are set on diverging paths in terms of monetary policy, we find that theU.S. economy will have the greatest gravitational pull in 2014,” LaPointe said.

The Fed is trimming its stimulus as Vice Chairman Yellen prepares to succeed Chairman Ben S. Bernanke when his second term ends Jan. 31; the Senate is scheduled to vote today on her nomination. The central bank will pare its monthly bond purchases by $10 billion to $75 billion this month, “reflecting cumulative progress and an improved outlook for the job market,” Bernanke told reporters after the Dec. 18 announcement.

The Federal Open Market Committee probably will continue tapering over its next seven meetings before ending the program in December, according to the median forecast of 41 economists in a Bloomberg survey last month.

The Fed announced its intentions after the jobless rate fell to a five-year low in November and as economists including Martin Feldstein of Harvard University and former Treasury SecretaryLawrence Summers predict the economy will accelerate this year. JPMorgan Chase & Co. economists raised their estimate last week for growth to 2.8 percent, higher than the 2.5 percent they projected a month ago and the 1.9 percent they calculate for 2013.

Adding Jobs

Manufacturing grew in December at the second-fastest pace in more than two years, and a report scheduled for release this week will show employers added 195,000 jobs last month, according to a Bloomberg News survey of economists.

The challenge for other central banks is that if long-term borrowing costs do rise in the U.S., this may pull up comparable rates elsewhere, threatening more-fragile expansions and forcing a response from policy makers, said Andrew Wilson, chief executive officer for Europe, the Middle East and Africa at Goldman Sachs Asset Management in London.

“Historically, markets are highly correlated, so if we see U.S. rates rising, it’s going to be hard for European rates to stay where they are,” Wilson told Bloomberg Television’s “On the Move” with Francine Lacqua on Dec. 17. “It’s going to be interesting with central banks moving in different directions.”

Cutting Rates

The ECB is already on the offensive against weak price pressures, cutting its benchmark rate to0.25 percent in November to shore up inflation now less than half its target of just below 2 percent. Gross domestic product in the euro region fell 0.4 percent in the third quarter, and October unemployment was 12.1 percent, down from a record 12.2 percent.

President Mario Draghi has refused to rule out further cuts and pledged rates will stay low for an “extended period.” He has signaled the bank may be willing to charge financial institutions to hold their cash or offer new long-term loans.

If deflationary risks mount significantly, Draghi will need to start buying assets just as the Fed is winding down, according to Ken Wattret, an economist at BNP Paribas SA in London. Policy makers are split on whether to buy government bonds, meaning they probably would start with private-sector securities, such as assets based on outstanding loans to small-and medium-sized enterprises, he said.

Inflation Target

The Bank of Japan, which in April intensified asset purchases and introduced a new inflation target, also may pursue more stimulus as the government raises the sales tax to 8 percent from 5 percent this April to curb its debt.

Bank officials see significant scope to boost Japanese government asset purchases if needed to achieve their 2 percent inflation target, according to people familiar with the matter. The current pace, equivalent to 70 percent of new government debt issued, isn’t a limit for many officials, the people said last month. They asked not to be named as the talks are private.

While the Bank of England indicates its benchmark rate will stay at 0.5 percent this year, it is inching toward a stimulus exit, saying in November it would dilute a credit-boosting program as housing prices, sales and mortgage demand all accelerate. Prices rose in December and will extend gains this year, property researcher Hometrack Ltd. said on Dec. 30.

Housing Boom

Other developed-nation central banks may go even further in tightening. Economists in a Bloomberg News survey predict the Reserve Bank of New Zealand will be the first to raise its benchmark rate this year, from 2.5 percent, as accelerating economic growth and a housing boom stoke price pressures.

The risk of a premature withdrawal of support -- as inflicted by the Bank of Japan in 2000 and the ECB in 2008 and 2011 -- leaves central banks likely to use more so-called forward guidance in 2014. The theory goes that if they avoid mixed messages and signal how long they expect interest rates to stay low, investors will respond by restraining market borrowing costs, too, helping households and companies.

Fed officials have honed their message as they try to underscore that tapering isn’t the same as tightening monetary policy. The FOMC made a commitment last month to keep the benchmark federal funds rate near zero “well past the time” unemployment falls below 6.5 percent, especially if projected inflation continues to run below their 2 percent target.

Push Forward

Such actions were “intended to keep the level of accommodation the same overall and to push the economy forward,” Bernanke told reporters on Dec. 18.

U.S. unemployment was 7 percent in November, and the Fed’s preferred measure of inflation was 0.9 percent the same month. In Britain, with unemployment already at 7.4 percent, the Bank of England may follow by saying it won’t consider raising rates before joblessness reaches 6.5 percent or even lower, according to Brian Hilliard, chief U.K. economist at Societe Generale SA in London. Its current threshold is 7 percent, a level it now expects to be reached by the third quarter of 2015.

Even if 2014 does mark the beginning of the end of widespread global stimulus, support will be drawn down slowly. Analysts at Credit Suisse Group AG predict the balance sheets of central banks will balloon by about another 19 percent this year. Those at JPMorgan Chase estimate the average interest rate of advanced economies will be almost unchanged, at 0.33 percent at the end of the year.

Price-Pressure Weakness

The reason to keep money cheap is that price pressures still are weak and hiring fragile in most of the industrial world, with JPMorgan Chase estimating global inflation was about 2.8 percent last year, the second-lowest since World War II. Policy makers also will be wary of rocking markets as the Fed did last summer when it began signaling tapering was pending.

“The risks are more skewed in the direction of getting the timing of monetary policy wrong,” said Bill Street, head of investments for Europe, the Middle East and Africa at State Street Global Advisors in London. “There are plenty of tools to deal with inflation, but they are out of ammunition for deflation.”

By Simon Kennedy

Bloomberg News - India’s Rates Seen Elevated as Price Surge Risks Growth: Economy

Photographer: Dibyangshu Sarkar/AFP/Getty Images

Raghuram Rajan, governor of Reserve Bank of India, right, gestures as K.C. Chakrabarty, deputy governor, looks on during the Central Board Meeting at the Reserve Bank of India in Kolkata on Dec. 12, 2013

Indian interest rates will remain elevated as long as surging inflation imperils economic growth, a deputy governor of the country’s central bank said.

“If you are having continuously high inflation, it will kill your growth,” theReserve Bank of India’s K.C. Chakrabarty told Bloomberg TV India yesterday. “If interest rates are high, that’s because inflation is high, and unless inflation is brought down, interest rates will not come down.”

Governor Raghuram Rajan is seeking to quell consumer inflation of more than 11 percent, the highest in the Group of 20 major economies, as bottlenecks in the supply of everything from food to energy stoke price increases. He surprised economists last month by holding the benchmark repurchase rate at 7.75 percent instead of adding to increases totaling 50 basis points since taking over the RBI in September.

“Inflation is likely to remain elevated this year as well and may average over 9 percent,” said Sonal Varma, an economist at Nomura Holdings Inc. in Mumbai, who expects Rajan to raise the key rate by 25 basis points at the next policy meeting on Jan. 28. “Continuing price pressures will leave the RBI with no choice but to raise the repurchase rate.”

Ashima Goyal, a member of an RBI committee that makes recommendations to Rajan on monetary policy, said in an interview earlier this week that he will avoid further increases to the repo rate if inflation fell in December, and may even have room for a reduction. She didn’t specify how much prices need to drop in that scenario.

Costly Onions

Consumer prices climbed 11.24 percent in November.Wholesale inflation was 7.52 percent, a 14-month high, as onion prices tripled from a year earlier.

“We have to improve the productivity, efficiency, distribution system, and, at the same time, keep our monetary policy such that demand factors should not play a role,” Chakrabarty, 61, said in the interview in Mumbai.

A weaker rupee is among the causes of Indian inflation, with the currency down about 12.5 percent against the dollar in the past year. The yield on the 10-year government bond has climbed to 8.84 percent from about 8 percent in the same period.

“The depositor has to be given a higher return than inflation, otherwise he will not save money,” said Chakrabarty, who has been an RBI deputy governor since 2009.

Prime Minister Manmohan Singh’s government has struggled to stem a decline in India’s savings and investment ratios.

Savings as a proportion of gross domestic product fell to 30.6 percent in 2013 from 36.8 percent in 2007, according to International Monetary Fund estimates. Investment dipped to 35 percent from 38.1 percent.

Bad Loans

Chakrabarty said the RBI is concerned about non-performing assets in the banking industry. At the same time, he added that “if you say the system is going to collapse because of this NPA, the answer is no.”

The risk to India’s banking industry rose in the six months through September as bad loans surged and profitability slumped, the central bank said in a Dec. 30 report. The average gross bad-loan ratio may reach 4.6 percent of total lending by September 2014 from 4.2 percent as of Sept. 30, it said.

The $1.8 trillion economy will probably expand 5 percent in the 12 months through March 31, the same pace as the last fiscal year, which was the weakest in a decade, according to central bank estimates.     By Kartik Goyal