Finance Blog number 1

Romania’s central bank cut the benchmark interest rate by half a percentage point to the lowest level in 19 months as a deepening recession saps price pressures in the east European country.

The Banca Nationala a Romaniei lowered the monetary policy rate to 8 percent, the Bucharest-based bank said in an e-mail today, matching the expectations of all 13 economists surveyed by Bloomberg. The rate remains the highest in the European Union after Hungary cut its rate to 7.5 percent yesterday.

The bank has lowered the rate five times since February as austerity measures required by Romania’s international bailout made room for monetary easing needed to soften the impact of the recession. The latest cut comes two months before presidential elections on Nov. 22 that pit the two governing parties against each other and threaten to break up the governing coalition.

“The decision is as expected, so no real surprise at this stage,” Raffaella Tenconi, chief economist at Wood & Co. in Prague, said in an e-mail today. “Clearly the political situation is an important factor going forward and I expect a temporary pause of the monetary easing cycle for a few months.”

Twenty of the 53 central banks tracked by Bloomberg eased monetary policy in the past three months to fight the recession, including eastern European countries such as Russia, Hungary and the Czech Republic.

International Bailout

Romania’s economy contracted an annual 8.7 percent in the second quarter, the most on record, and inflation slowed to a two-year low in August as consumption dropped.

The central bank left the minimum reserve requirements on foreign-currency commercial deposits at 30 percent and 15 percent on deposits in lei. The bank has cut the foreign currency rate from 40 percent and 18 percent on lei deposits so far this year.

“They were loosening requirements too fast, so generally I think this is welcome news,” Tenconi said. “I think it’s possible they will cut requirements further in November, but leave interest rates unchanged in order to support lending.”

Romania’s leu was higher against the euro after the interest rate announcement, advancing as much as 0.6 percent to 4.18743 versus Europe’s common currency. The Bucharest Stock Exchange’s benchmark BET Index rose 0.2 percent to 4,401.36.

‘Sustainable’

“A firm and consistent implementation of the macroeconomic policy mix — monetary, fiscal and income — and structural reforms are essential for achieving a further sustainable disinflation and for a lasting and sustainable relaunch of economic activity,” the central bank said in a statement explaining today’s move. “The monetary policy stance stayed prudent.”

Romania got a 20 billion-euro ($29 billion) international loan led by the International Monetary Fund and the EU this year to finance its budget and current-account gaps. The government predicts the economy will shrink about 8.5 percent this year, after growing 7.1 percent last year, the fastest pace in the EU. It predicts an emergence from a recession in the fourth quarter and growth of about 0.5 percent next year.

As a condition for receiving the loan, the government froze state wages this year and pledged to cut spending to meet a budget target of 7.3 percent of gross domestic product in 2009.

Hungary, Ukraine, Belarus, Latvia and Serbia have also sought bailouts to prevent defaults and aid banks.

The bank, which will hold its next rate-setting meeting on Nov. 3, said it will “closely monitor domestic and global economic developments so that, by using its available instruments, to ensure the fulfillment of its objectives of achieving and maintaining price stability in the medium-term.”

Inflation slowed to a two-year low of 5 percent in August compared with 5.1 percent in July. The central bank forecasts the inflation rate will fall to 4.3 percent by the end of this year and 2.6 percent in 2010.

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The Bank of Japan’s Tankan survey will probably show this week that the economic recovery is too weak to convince companies to invest.

Large firms plan to cut capital spending by 9 percent this year, little changed from estimates made three months ago as the nation was emerging from a recession, economists predict the Oct. 1 report will show. Sentiment among big manufacturers is expected to gain for a second period after March’s record low.

Toyota Motor Corp., which has benefited from worldwide government efforts to boost consumption, is still producing a third fewer cars than it is able to build. Bank of Japan Governor Masaaki Shirakawa said this month that while the economy is showing “signs of recovery,” he’s not confident that demand will hold up.

“Whatever the improvements, the absolute level of economic activity is extremely low, much lower than in the initial stage of previous economic recoveries,” said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. “Plans for business investment should remain very weak.”

Gains in the yen are compounding exporters’ woes by making their products more expensive and eroding the value of profits earned abroad. The Japanese currency climbed to 89.17 per dollar at 11:40 a.m. in Tokyo after earlier reaching an eight-month high of 88.24. The Nikkei 225 Stock Average dropped 2.4 percent.

Pare Spending

Companies in the central bank’s June survey said they plan to pare spending 9.5 percent this year.

The Tankan index of sentiment among large makers of cars, electronics and other goods will rise to minus 33 from minus 48 in June, analysts forecast. The improvement would only restore the index to a level on par with that during the depths of the 2001 recession. The index fell to a record low of minus 58 in March. A negative number means pessimists outnumber optimists.

“It’s not a question of getting happy, it’s a question of getting less miserable,” said Richard Jerram, chief economist at Macquarie Securities Ltd. in Tokyo. “Financial markets have stabilized, financing is clearly available and you have some sense of where final demand is going.”

Japan’s export markets are showing signs of picking up. Federal Reserve Chairman Ben S. Bernanke said this month the “recession is very likely over” and the Fed last week indicated the economy has improved enough to allow some emergency lending programs to be scaled back.

Toyota’s U.S. sales rose for the first time since April 2008 in August, buoyed by the government’s “cash for clunkers” program. The automaker will likely raise global production this year by half a million vehicles to meet demand for its Prius hybrid and replenish inventories, the Nikkei newspaper reported last week.

Toyota Output

Even with the increase, output will be one third below the 10 million units that Toyota is able to build. The company forecasts a 450 billion yen ($5 billion) loss this year.

Growth in China, which this year surpassed the U.S. as Japan’s biggest export customer, has also been a boon to manufacturers. Sharp Corp. says subsidies to encourage spending on household appliances will help boost its China sales about 3 percent this year.

About 40 percent of Japan’s factory capacity still sits idle after five months of production increases, weighing on corporate profitability and giving companies little reason to invest or hire. Some $2 trillion in global stimulus measures, coupled with replenishment of inventories, are only providing a temporary boost to sales.

“This is not what will drive the economy into sustainable growth,” said Martin Schulz, senior economist at Fujitsu Research Institute in Tokyo. “There isn’t much original demand from the market side, from the household side, or from the corporate side.”

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Spain will raise value-added tax and levies on savings as the government seeks 11 billion euros ($16.2 billion) to tame one of the euro region’s largest budget deficits even as the economy is still mired in recession.

Value-added tax will rise to 18 percent from 16 percent, and the reduced rate will climb one percentage point to 8 percent on July 1, 2010, Finance Minister Elena Salgado said. The central government’s deficit will be 5.4 percent next year, tighter than a 5.7 percent estimate in June, and the overall deficit will be 8.1 percent, compared with a previous forecast of 8.4 percent.

Tax on income from savings will also increase, to 19 percent on the first 6,000 euros and 21 percent for the rest, and a 400-euro annual rebate for all taxpayers will be scrapped. Of the planned 11 billion euros, 6.5 billion euros will be raised in 2010.

Even as the Spanish economy remains mired in a recession and may take longer to recover than the rest of Europe, Spain’s government is among the first to raise taxes as it seeks to control a ballooning budget deficit that has increased its borrowing costs. The government is boosting welfare benefits at a time when the highest jobless rate in Europe is draining public coffers, and the Organization for Economic Cooperation and Development expects Spain will run the euro region’s second- largest deficit after Ireland this year.

Ireland, Finland

Ireland, which unlike Spain had to bail out its banking sector and faces an even deeper economic contraction, raised taxes in April in an emergency budget. Finland plans to increase value-added tax by 1 percentage point on July 1 next year.

Spain plans to raise 5.7 billion euros by scrapping the 400-euro tax rebate, and 5.2 billion euros from the VAT hikes, the ministry said in a presentation.

European policy makers including EU Economic and Monetary Affairs Commissioner Joaquin Almunia have said it is too early to implement strategies to end extraordinary fiscal and monetary policies no fax cash loans. Spain will continue its stimulus efforts next year.

Standard & Poor’s cut Spain’s top AAA credit rating in January and the extra interest that investors demand to hold Spanish debt rather than German equivalents is 51 basis points, four times more than it was at the start of 2008. The extra interest, or spread, has come down from 128 basis points in February, a record in the euro’s lifetime. Moody’s Investors Service rates Spain Aaa and said Sept. 9 it was unlikely to cut that rating.

Debt Burden Grows

Debt will amount to 62.5 percent of GDP, Salgado said. Spain’s debt burden was 40 percent of GDP in 2008, compared with 69 percent for the euro region overall. This year’s public- sector deficit, forecast at 9.5 percent, will be the widest since at least 1980, according to Finance Ministry data that don’t take into account a change in methodology in 1995.

Salgado maintained forecasts for the economy to shrink 3.6 percent this year and 0.3 percent in 2010.

At 16 percent, the Spanish standard rate of value-added tax was one of the EU’s lowest after Luxembourg and Cyprus, according to the EU statistics office. Spain’s overall tax burden, or revenue as a share of GDP, will rise 1 percentage point, Salgado said, and remains below the EU average, which Eurostat estimates was 39.8 percent in 2007.

The draft budget will be presented to parliament next week, where the government doesn’t have a majority and will have to secure the support of smaller parties to get the bill approved. Parliament has until the end of the year to pass the bill.

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Iceland’s central bank left the benchmark interest rate unchanged as policy makers try to support the currency before capital restrictions are scaled back later this year.

Reykjavik-based Sedlabanki kept the repo rate at 12 percent, according to a statement on its Web site today. The bank has lowered the rate four times this year from a record 18 percent since obtaining a $5.1 billion loan from a group led by the International Monetary Fund.

Iceland’s economic collapse, sparked by the failure of its biggest banks in October, forced the island to impose capital controls to prevent a sell-off of the krona at the end of last year. Restrictions failed to prevent a 7.9 percent krona decline against the euro this year and the IMF has warned that the central bank needs to focus on keeping the currency stable as Iceland targets relaxing capital controls from November.

“The central bank’s main focus is on maintaining the rate of the krona, which should limit the chances of policy rate changes into the second quarter of 2010,” Ingolfur Bender, head economist of Islandsbanki, said before the announcement.

At 12 percent, Iceland’s benchmark is Europe’s joint highest, together with Serbia’s two-week repo rate.

Iceland’s currency is undervalued, Governor Mar Gudmundsson said in an Aug. 26 interview, and the bank’s main challenge is to “find opportunities” to lower rates without harming the krona as capital controls are eased. The bank hasn’t ruled out raising interest rates to prevent the value of the krona from decreasing, once capital controls are removed.

Stricter Surveillance

The central bank announced on Sept. 18 that it would impose a stricter surveillance of the island’s capital restrictions, after breaches weakened the currency. The bank is investigating “dozens” of violations of the capital controls, it said then.

The krona rate will average 169.2 against the euro this year and 168.9 in 2010, the central bank said on Aug. 13. That compares with 183.01 against the euro yesterday and an average rate of 180.52 since the end of June.

Iceland will allow new investors to avoid capital controls starting Nov. 1, provided the island meets a set of economic conditions, including stabilizing its financial system and currency, the central bank said on Aug. 5. Controls will be lifted in two stages, with the first step allowing foreign- currency inflows linked to new investments to circumvent controls and the second step freeing long-term outflows.

Drive Policy

Franek Rozwadowski, the IMF’s representative on the island, said in a July 2 interview that the target of keeping the krona stable is “what should drive monetary policy.”

Inflation slowed to an annual 10.9 percent in August, from 11.3 percent in July, the statistics office said on Aug. 27.

The central bank expects inflation to approach its 2.5 percent target early next year, it said on Aug. 13. There is also the “possibility” of “temporary deflation” in late 2010 and 2011, the bank said.

The central bank estimates Iceland’s economy will contract by 9.1 percent this year. Household spending will slump 19.7 percent and fixed investment will plunge 48.4 percent, according to the bank.

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New Zealand emerged from its worst recession in three decades, unexpectedly expanding for the first time in six quarters on rising consumer spending and exports of logs and dairy products. The nation’s currency surged.

Gross domestic product increased 0.1 percent in the three months to June 30 following a 0.8 percent drop in the first quarter, Statistics New Zealand said in Wellington today. The median estimate in a Bloomberg survey of 12 economists was for a 0.2 percent contraction.

New Zealand’s dollar rose to a 13-month high as traders increased bets that Reserve Bank Governor Alan Bollard may raise interest rates sooner than he indicated earlier this month. Bollard, who expected a second-quarter contraction, said on Sept. 10 the benchmark interest rate needed to stay at a record-low 2.5 percent until late next year.

“We see the scope for growth to add pressure to monetary policy expectations over the second half,” said Bernard Doyle, economist at Goldman Sachs JBWere Ltd. in Auckland. “We continue to believe the first rate hike will come mid-next year, but with a reasonable chance of an earlier move.”

New Zealand’s dollar surged as high as 73.12 U.S. cents from 71.94 cents before the report was released. It bought 72.66 cents at 1:15 p.m. in Wellington.

The currency has gained 2.8 percent in two days after the nation yesterday posted the narrowest current account deficit in more than four years. Fonterra Cooperative Group Ltd., the world’s largest dairy company, also raised its milk price forecast yesterday for the coming year, boosting farm incomes.

Rate Outlook

Traders expect Bollard will raise the official cash rate by 149 basis points over the next year as the economy recovers, according to a Credit Suisse index based on swaps prices. A basis point is 0.01 percentage points.

Bollard may be reluctant to raise the benchmark too soon because that may further stoke the currency and curb exports, which make up 30 percent of the economy. New Zealand’s dollar has gained 27 percent against the U.S. dollar in the past six months, the second best performing major currency after South Africa’s rand.

“The strength of the currency will continue to be a concern and a risk to the forecast recovery,” said Robin Clements, chief New Zealand economist at UBS AG in Christchurch.

The current account deficit narrowed to 5.9 percent of GDP in the year ended June 30, the smallest gap since the year ended Sept. 30, 2004, Statistics New Zealand said yesterday.

Fonterra raised its milk forecast 12 percent, citing increased global demand. Economists estimated that would add at least NZ$700 million ($510 million) to farm incomes.

‘Patchy Recovery’

Bollard this month forecast the economy shrank 0.1 percent in the second quarter and would undergo a “patchy recovery” in the second half of the year. He projected growth of about 0.8 percent a quarter in 2010.

Gross domestic product began contracting early last year after Bollard raised interest rates in 2007 to counter a housing boom and consumer spending that was being fanned by excessive borrowing.

An ensuing collapse in world trade and tight credit conditions stalled business confidence and demand for exports. The New Zealand dollar’s gain also curbed overseas shipments, which make up a third of the economy.

As sales slumped, companies shut plants and fired workers, pushing up the jobless rate to a nine-year high of 6 percent in the three months ended June 30.

Record-low interest rates, government spending and fewer New Zealanders heading overseas for higher-paid jobs has helped revive the housing market and consumer confidence.

House Prices

Second-quarter house prices rose for the first time in six quarters and have continued to gain, according to the government. Consumer confidence rose to an 18 month high in June, according to a Westpac Banking Corp./McDermott Miller Ltd. poll.

Household spending, which makes up 60 percent of the economy, rose 0.4 percent in the second quarter, the first gain in six quarters, today’s report showed.

Sales of food and other so-called non-durable goods gained 0.8 percent and spending on services increased, led by medical and health. Purchases of durable items such as cars, furniture and home appliances declined.

Warehouse Group Ltd., the nation’s largest discount retailer, said on Sept. 11 that sales increased in the three months ended Aug. 2, the first quarterly gain since early 2008.

Exports of goods and services increased 4.7 percent in the second quarter amid higher shipments of dairy products and lumber. Tourist spending in New Zealand declined. Import volumes slumped 3.8 percent.

Business investment increased 1.3 percent as companies spent more on software and on oil gas exploration, the statistics agency said. Plant and machinery investment fell.

Inventories declined by a record amount as demand for exports was met through existing stock rather than production, the agency said.

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The recovering housing market may be heading for a relapse as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke consider ending support for the source of the global financial crisis.

The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.

Ending these efforts may stifle the housing rebound by depressing sales and pushing up both mortgage-backed bond yields and interest rates on home loans, even in the face of the record-low zero to 0.25 percent short-term rates the Fed has engineered, said economist Thomas Lawler. A weaker housing market would likely dampen the economic recovery and undercut shares of builders including Fort Worth, Texas-based D.R. Horton Inc. and Miami-based Lennar Corp., that have risen 40 percent this year, based on the Standard and Poor’s Supercomposite Homebuilding Index of 12 companies.

“Things could get ugly,” said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, D.C.-based government-controlled mortgage- finance company. “We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”

Major Test

This is the first major test of policy makers’ ability to coordinate exit strategies as they seek to wean the economy off government support, said Brian Bethune, chief financial economist of IHS Global Insight, a forecasting company in Lexington, Massachusetts.

They have already acted separately, with the administration ending its $3 billion “cash-for-clunkers” automobile trade-in program on Aug. 24 and the Fed starting to wind down its purchases of Treasury debt, which totaled $285.2 billion between March 25, when the initiative began, and Sept. 16.

The 55-year-old Bernanke and his colleagues, who meet tomorrow and Wednesday to map monetary strategy, discussed “tapering” off the Fed’s purchases of mortgage-backed securities and housing-agency debt at their last gathering in August, according to the minutes of that meeting. No decision was made by the central bank’s policy-making Federal Open Market Committee.

Mortgage-Backed Securities

Under the current program, the Fed is scheduled to buy up to $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of the year. So far, it has purchased $862 billion of the former and $125 billion of the latter.

A trio of Fed presidents — Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta — has publicly raised the possibility the central bank might not spend all the money authorized for the mortgage-backed securities. Lacker questioned whether the economy needs the additional stimulus in an Aug. 27 speech.

New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious.

“The market expects us to complete these programs,” he said Aug 31. “To contradict that market expectation is a pretty high hurdle.”

Abrupt Stop

An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official. Tapering off — by reducing weekly purchases and stretching them beyond the end of the year — would have a more muted effect, pushing rates up by at least a quarter percentage point, he said, adding that the Fed may announce just such a strategy after its meeting this week.

Mortgage rates for 30-year fixed home loans averaged 5.04 percent in the week ended Sept. 17, down from 5.07 percent the previous week, according to McLean, Virginia-based Freddie Mac, a government-controlled mortgage-finance company.

Borrowing costs for home buyers are relatively high based on the historical relationship with the Fed’s target rate for overnight loans between banks, currently at zero to 0.25 percent.

The yield on the benchmark 10-year Treasury note is 3.22 percentage points more than the federal-funds rate, compared with an average of 1.45 percentage points during the past 20 years, according to data compiled by Bloomberg. Thirty-year mortgage rates average 1.69 percentage points more. While that is down from 3.19 percentage points in December, it is still above the average of 1.4 percentage points for this decade before the credit markets seized up in the second half of 2007.

Fed Purchases

The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial american family insurance.

Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said. The spread now is about 140 to 145 basis points, down from around 215 at the start of the year.

“One of the key linchpins to the restabilization of our economy is getting housing back,” said Laurence Fink, chairman and chief executive officer of New York-based BlackRock Inc., the largest publicly traded U.S. money manager. “There is a great need” for the Fed to “continue to invest in the mortgage market right now,” added Fink, 56.

Crucial Extension

A number of Washington-based organizations — the National Association of Home Builders, the National Association of Realtors and the Mortgage Bankers Association — say an extension of the buyer’s tax credit is also crucial.

Lawrence Yun, chief economist of the realtors’ group, estimates that about 350,000 home sales through August were directly attributable to the tax credit of up to $8,000 for first-time buyers. People buying their first homes accounted for 43 percent of sales since the credit became law, up from 32 percent in the six weeks prior to its passage, according to Washington-based Campbell Communications Inc.

Treasury Secretary Timothy Geithner, 48, called signs of stabilization in the U.S. housing market “very encouraging” and told reporters on Sept. 17 that the Obama administration will take a “careful look” at extending the credit.

‘Slim’ Chances?

Congress may not pass an extension; the chances “seem slim,” said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former staffer on the Senate Banking Committee. Public opposition to increasing the federal budget deficit is high, and there’s little appetite on Capitol Hill for finding spending cuts to offset the cost of the tax credit, he said.

The deficit will total $1.6 trillion this year as revenue falls and the government spends at the fastest pace in 57 years, according to the nonpartisan Congressional Budget Office.

In a sign of the public’s concern about the deficit, 62 percent of people surveyed in a Sept. 10-14 Bloomberg News poll said they would be willing to risk a longer-lasting recession to avoid more government spending.

The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.

“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”

Housing Starts

Single-family housing starts fell 3 percent in August to a 479,000 annual rate — the first decline since January — according to seasonally adjusted figures in a Sept. 17 report from the Commerce Department.

Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California. Real-estate sales fuel consumer spending, which historically accounts for about 70 percent of gross domestic product, he said.

“Housing has been the sector of the economy with the largest multiplier effect,” said Berson, former chief economist at Fannie Mae. “Whether buying new homes or existing homes, people tend to fill them up with things: new furniture, new appliances, new window coverings.”

Recovery Signs

To be sure, some economists are betting the housing recovery is here to stay. The market has “clearly bottomed,” said Dean Maki, chief U.S. economist for Barclays Capital in New York.

Even some of the optimists are hedging their bets given how dependent the market has been on government and central bank support.

“I’m right in there with the rest of the cheerleaders, but there are no historical anecdotes, no historical data points to use for this,” said Lewis Ranieri, the 62-year-old mortgage- bond pioneer who is chairman of New York-based Hyperion Partners LP. The U.S. housing market is “still very fragile.”

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U.K. mortgage approvals by the nation’s six biggest banks increased for a seventh month in August to the highest level this year, a sign the housing-market slump is easing.

The number of loans granted by the institutions rose to 57,000 from 53,000 in July, according to a sample from the Bank of England’s lending panel released today in London. That’s the highest since records began in December. Banks also indicated the stock of loans to companies deteriorated further in August after the weakest month on record in July.

The Bank of England this month kept up its program to buy bonds with newly created money to bolster lending and stimulate economic growth. While reports from mortgage lenders and surveyors suggest that property prices have stopped falling, declines may resume if rising unemployment prompts homeowners to sell their properties.

“Mortgage lending picked up slightly,” the central bank said in a statement. “That is consistent with the recovery in their approvals for house purchase,” though “major U.K. lenders remained cautious about the prospects for house prices and unemployment.”

Separately, the U.K.’s statistics office said today that Britain posted the biggest budget deficit for any August since modern records began in 1993 as the recession destroyed taxes.

Lending Panel

The U.K. housing market may have stabilized after more surveyors reported a gain in home values than a drop for the first time in two years, a report by the Royal Institution of Chartered Surveyors showed on Sept payday loans. 15. A majority of Britons say now is a good time to buy a home, a survey by the Building Societies Association showed this week.

The Bank of England’s sample covers data from Banco Santander, Barclays Plc, HSBC Holdings Plc, Lloyds Banking Group Plc, Nationwide Building Society and Royal Bank of Scotland Group Plc. Together they accounted for about 70 percent of mortgage lending at the end of 2008.

Lending to companies dropped further as some businesses paid back bank debt with proceeds from capital-market issuance, the central bank said.

“Lenders have yet to detect any significant increase in demand for new lending over and above the refinancing of existing facilities,” the bank said. “The availability of finance remains more constrained for smaller companies.”

The big banks said that net capital issuance may curb lending to companies for the rest of the year, the bank said.

The central bank also said today that M4 money supply, the broadest measure of money in the economy, rose 12.6 percent from a year earlier in August, the least since September 2008. On the month, it increased 0.1 percent.

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White House economic adviser Lawrence Summers urged lawmakers to pass legislation that would toughen supervision of the financial system, saying a failure to act swiftly would leave the economy vulnerable to another crisis.

“We believe it is critical to move rapidly while the events of the last years are clearly in mind,” Summers said in a speech today at Georgetown University in Washington. He warned that “a failure to change the rules of the road will result in future crises that will adversely affect the lives of millions and cost taxpayers untold sums.”

The Obama administration is pushing Congress to enact the most sweeping overhaul of financial regulation in 75 years, seeking to tighten oversight of Wall Street after a series of shocks that toppled major securities firms, froze credit markets and led to the worst recession since the 1930s.

The Treasury Department has proposed giving the Federal Reserve greater authority over the capital, liquidity and risk- management standards of the largest financial firms. Congressional leaders haven’t supported the proposal and are considering giving broader authority to a council of regulators.

Summers, director of the White House’s National Economic Council, said “a paramount objective must be to address the issue of moral hazard” that leads to excessive risk taking.

Consumer Protection

Summers also defended the Administration’s call for a consumer protection agency for financial products against an ad campaign financed by the U.S. Chamber of Commerce that charges the idea would constrain small businesses from extending credit to customers.

He compared the ads to charges that Obama’s health-care plan would create “death panels” that would deny the elderly medical care. Obama denounced those assertions as “a lie, plain and simple” in a speech to a joint session of Congress on Sept. 9.

“I would suggest those ads are the financial-regulatory equivalent of the death-panel ads that are being run with respect to health care,” Summers said. “Those with an argument make it and those without a good argument try to scare people. And that is what is happening here.”

Summers added that the White House considered the consumer protection agency a key element of its regulatory plan.

Obama ‘Determined’

“This is a critical issue,” he said. “It is one on which the president is determined.”

Summers defended the administration’s economic-stimulus package as a “necessary” step to revive the economy, even though it swelled the budget deficit. A key financier of the shortfall has been China, he said.

With about $801 billion in U.S. government debt, China is the largest foreign holder of Treasuries.

“We have a substantial appetite to borrow and they have a substantial appetite to hold reserves and lend to us,” Summers said. “That is a relationship that has been very substantially in our mutual interests and it has very much been a source of support for both economies.”

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Japanese Finance Minister Hirohisa Fujii said the government will draft a plan to redeploy unused funds from the current fiscal year’s extra budget by Oct. 2.

Fujii, whose Democratic Party of Japan took office this week for the first time, is counting on tapping part of former Prime Minister Taro Aso’s 13.9 trillion yen ($153 billion) supplementary budget to implement its election promises ranging from lower public-school tuition to providing childcare aid. Each ministry will be charged with coming up with items that can be slashed from the budget, Fujii said guaranteed unsecured personal loan.

The government will probably be able to extract “several trillion yen” from the budget, which ministers agreed to freeze today, Fujii said at a press conference in Tokyo today.

Naoki Minezaki, 64, acting head of the DPJ’s tax panel, and Yoshihiko Noda, 52, acting secretary general for the party, have been appointed vice finance ministers, Fujii said.

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Reports on industrial production and consumer prices today showed the U.S. economy is emerging from the economic slump without spurring inflation.

Output at factories, mines and utilities climbed 0.8 percent last month, exceeding the median estimate of economists surveyed by Bloomberg News, data from the Federal Reserve in Washington showed. The Labor Department said the cost of living climbed 0.4 percent, and was down 1.5 percent from August 2008.

Stocks rose, extending a global advance, after the reports underscored Fed Chairman Ben S. Bernanke’s view that the worst recession since the 1930s was probably over. A lack of price pressures means policy makers, meeting next week, can continue to leave the benchmark interest rate near record-low levels to give the economy time to gain speed.

“You’re getting growth with really no inflation,” said Joe LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “With the Fed out of play, it’s really a good combination for investors.”

The Standard & Poor’s 500 index increased 1.5 percent to close at 1,068.76. The MSCI World Index of 23 developed nations climbed to the highest level in almost a year. Equities also got a lift from Warren Buffett, who said the U.S. economy has “hit a plateau at bottom.” The billionaire investor last year called the financial crisis an “economic Pearl Harbor.”

Gaining Confidence

Another report today showed an index of homebuilder confidence climbed in September for a third consecutive month. The National Association of Home Builders/Wells Fargo’s measure climbed to 19, the highest level since May 2008, from 18 in August, the Washington-based group said. A reading below 50 means most respondents view conditions as poor.

Economists forecast industrial production would rise 0.6 percent, according to the median of 75 projections in a Bloomberg News survey. The Fed revised July’s increase up to 1 percent from the previously reported 0.5 percent. The back-to- back gain was the biggest since late 2005.

More production was helping to soak up excess capacity. The amount of industrial volume in use increased to 69.6 percent, the highest level since February.

Decreasing slack is among the reasons analysts are less concerned over the prospect of deflation, or a broad-based drop in prices that hurts the economy.

Deflation Threat

“The deflation trend is in the process of passing us, but we’re not completely there,” Ward McCarthy, chief financial economist at Jeffries & Co. Inc. in New York, said in an interview on Bloomberg Radio.

A 5.5 percent increase in the production of motor vehicles and parts led last month’s gain in output, the Fed’s report showed.

The Obama administration’s “cash-for-clunkers” trade-in program boosted auto sales in August, indicating automakers are likely to continue to gear up because of lean inventories and increasing demand.

General Motors Co. last month called back 1,350 union workers, its biggest one-time increase in jobs since 2006, as it boosted second-half production, in part because of the federal subsidies free credit report and score.

Factory output, which accounts for about four-fifths of industrial production, increased 0.6 percent after rising 1.4 percent the prior month. Excluding automobiles, manufacturing climbed 0.4 percent, indicating the gains were broad-based.

Exports

Foreign demand as the global economy recovers may also be helping U.S. factories. Exports rose 2.2 percent in July, according to a Commerce Department report released Sept. 10.

The department today also reported the U.S. deficit in the current account, the broadest measure of trade because it includes transfer payments and investment income, narrowed in the second quarter to the lowest level since 2001.

There are “signs of improvement” in the global economy, 3M Co. Chief Executive Officer George Buckley said in an interview on Sept. 5. Job cuts at the St. Paul, Minnesota-based company are mostly complete and it will step up investments in research and development, he said.

The Labor Department price report today also showed prices excluding food and energy increased 0.1 percent, matching expectations. They were up 1.4 percent from a year earlier, the smallest gain since February 2004.

The increase in the cost of living reflected a 4.6 percent jump in energy prices in August. Food prices, which account for about a seventh of the CPI, increased 0.1 percent in August, the smallest gain since January.

Food Prices

Companies such as Kroger Co. are keeping a lid on prices to revive demand as the economy starts to emerge from the recession. The largest U.S. supermarket chain yesterday reported second-quarter profit that fell more than analysts’ estimates as prices for some products, particularly produce and dairy, decreased more than expected.

“Most of us have never seen a selling environment like now,” Chief Executive Officer David Dillon said on a conference call, adding that prices will continue to decline over the next several quarters.

New vehicle prices plunged 1.3 percent, the biggest drop since 1972. The Labor Department said it considered the cash- for-clunkers initiative as a discount off purchase prices, contributing to the drop. The program gave buyers as much as $4,500 for trading in older models for new, more fuel-efficient autos.

Fed Action

Fed policy makers on Aug. 12 committed to keeping the key interest rate between zero and 0.25 percentage point “for an extended period” to promote economic recovery. They said they expected “inflation will remain subdued for some time.”

Former Fed Chairman Alan Greenspan, speaking yesterday to an investor conference, said inflation will continue to cool until next year.

“We’ve got worldwide disinflation in train and it will continue for a short while,” he said. “By the early months of next year the rate of inflation will fall below 1 percent on an annual rate” before starting to climb.

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