Finance Blog number 1

Stocks are likely to face another choppy, downtrodden week, but that’s no big surprise.

It’s the end of the summer, trading volume is light, and even though company earnings are generally strong, dismal economic reports have been kicking fears of a second-half slowdown into higher gear.

Add a little uncertainty about Bush tax cuts, interest rates and the logistics of financial regulatory reform to the mix, and investors are jittery to say the least.

"We know the economy is not suffering from a lack of money or liquidity. What the economy is desperately short of is confidence and visibility and the willingness to take risk," said Adrian Cronje, chief financial officer of investment firm Balentine.

The markets are coming off two weeks of losses as traders have been struggling to find a balance between upbeat company news and downtrodden data on jobs, manufacturing, and other economic indicators.

On one hand, the positive: A slew of mergers and acquisitions announced last week shows companies are ramping up their capital spending, which is a sign that they’re preparing for better times.

Earlier this week, mining giant BHP Billiton’s (BHP) $43.8 billion unsolicited bid for Canadian fertilizer-maker Potash Corp. (POT) was the biggest deal this year, bringing weekly M&A volume to $89.8 billion.

And on Thursday, Intel (INTC, Fortune 500) agreed to buy security software maker McAfee (MFE) for $7.68 billion, in what would be the chipmaker’s biggest acquisition ever.

Historically, August is a slower month for M&A activity but last week’s total is the largest of any August week in four years, according to Thomson Reuters.

On the other hand, the negative: The headline economic indicator continues to be jobs, and the news there has been grim at best. The number of first-time filers for unemployment benefits surged to a 9-month high last week and has been stuck in the mid- to higher 400,000s since November.

Economists are looking to see that weekly number of first-time filers tick down to 400,000 or lower before they’re truly convinced a recovery is underway easy to get unsecured personal loans. They’ll be closely watching for the government’s most recent jobs data on Thursday.

Cronje is not predicting particularly bad or good news for jobs this week, but if the numbers disappoint, watch out: "Any sign of the job market getting even worse from here will be taken badly," he said.

On the docket

Monday: No economic reports are on tap.

Tuesday: The July report on existing homes sales from the National Association of Realtors is due during morning trading Tuesday. Sales of existing homes fell 5.1% in June to a 5.37 million-unit pace — a sign of renewed turbulence in the housing market. Economists polled by Briefing.com are expecting July to show another slowdown in sales, down to 5.14 million.

Wednesday: The Commerce Department reports data on durable goods orders — a measure of products meant to last at least three years, such as cars and computers.

Recovering after the recession, orders rallied more than 20% between March 2009 and April 2010. But the measure has posted back-to-back declines for the last two months. Economists are forecasting a 3.4% increase for July.

They’re also waiting for the latest figures on new home sales, which are expected to show a slight uptick to 338,000 in July, up from 330,000 the month before.

Thursday: The government releases its weekly numbers on first-time unemployment filers. Last week, stocks took a hit when the number increased dramatically to 500,000 initial claims.

Friday: The government’s revised reading on gross domestic product is due on Friday.

GDP is the broadest measure of the nation’s economic activity. Economists surveyed by Briefing.com are expecting the government to revise the number to 1.4%, showing a significant slowdown from its previous reading of 2.4%. 

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Mining giant BHP Billiton said Wednesday that it would take its $38.6 billion cash offer for Potash Corp. directly to the shareholders, a day after the world’s largest fertilizer producer rejected unsolicited takeover bid.

The Australian company’s offer remains valued at $130-per-share offer, representing a 16% premium to Monday’s closing price.

"We firmly believe that Potash Corp. shareholders will find the certainty of a cash offer, at a premium of 32% to the 30-trading day period average, very attractive, and we have therefore decided to make this offer directly to those shareholders," said BHP chairman Jac Nasser in a statement payday loan.

Shares of Potash (POT), which spiked almost 28% Tuesday following the rejection, gained 3% Wednesday.

Meanwhile, BHP’s (BHP) stock, which slipped 2.4% Tuesday, lost another 3% Wednesday. 

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The iPhone 4 has arrived, but for some people the wait continues as Apple sprints to keep up with fierce demand for its latest gadget.

From Tokyo to St. Louis, some stores started selling out of Apple Inc.’s newest iPhone just hours after it went on sale Thursday. Some anticipated the demand and made sure they were in line early to get one.

Malinda Hagenhoff, of Jefferson City, stayed in her car in a parking lot overnight Wednesday to be among the first in line at West County Center in Des Peres on Thursday morning.

"I’m kind of a techy person who loves techy stuff," said Hagenhoff, who already owns an iPhone but wanted the newest model.
She was No. 30 in line when mall opened at 6 a.m., but that put her ahead of 120 others to await the Apple Store’s 7 a.m. opening.

As the line stretched farther and farther into the mall, other fanatics sought different sources.

Tyler Woods, 20, of south St. Louis, traveled with two friends to a Walmart store in Arnold.

"This has to be some kind of miracle," Woods said when he arrived in line at the Walmart store at 8:45 a.m. and was told he would get one of the 24 iPhones the store had in stock.

Similar stories were told around the globe. Thousands lined up outside stores in Tokyo, Berlin, New York and elsewhere. Some said they waited 11 hours to get through the lines.

Going into Thursday, concern was raised about limited supplies after more than 600,000 people rushed to pre-order iPhones on the first day they were available, prompting Apple and its U.S. carrier, AT&T Inc., to halt orders for shipment by Thursday’s launch. On Apple’s website, new orders weren’t promised for delivery until July 14.

Apple spokeswoman Natalie Harrison said demand was "off the charts," and that the company was working hard to get phones into customers’ hands as quickly as possible.

Some stores sold out within hours. Brian Marshall, an analyst for Gleacher & Co., said certain Apple stores likely had enough iPhones to last into today before selling out. A new shipment could be in stores as early as Saturday, he said, but more likely won’t arrive until early next week.

Apple is having a hard time getting enough of the new custom parts for the iPhone 4, such as its new higher-resolution screen, Marshall said.

Apple has said the white iPhone it plans to produce has been more challenging than expected and won’t be available until late July. Only black models went on sale Thursday.

The Associated Press and Robert Cohen, Kim Bell and Matthew Franck of the Post-Dispatch contributed to this report.

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Emerson Electric Co., the electrical products maker seeking to acquire Chloride Group Plc, fell the most in more than a year after second-quarter sales trailed estimates and data showed Chinese manufacturing was slowing.

Ferguson-based Emerson dropped $3.44, or 6.4 percent, to $50.18 in New York Stock Exchange composite trading, the biggest percentage decline since Feb. 17, 2009. The shares have gained 18 percent this year.

Revenue for the quarter was $5.14 billion, compared with an average estimate of $5.22 billion from 12 analysts surveyed by Bloomberg. Net income climbed 8.6 percent to $405 million, or 53 cents a share, from $373 million, or 49 cents, a year ago.

"Revenues came in light, which is different than most diversified industrials," Joel Levington, a managing director of corporate credit for Brookfield Investment Management Inc. in New York, said in an e-mail. Concern that Chinese manufacturing is slowing pulled some stocks lower, "and China has been an area of growth," he said.

Emerson last week made a $1.1 billion (723 million pound) offer to buy Chloride, Britain’s largest maker of backup power equipment, to expand its network power division.

Ferguson Chief Executive David Farr declined to discuss Emerson’s efforts to acquire Chloride, citing U.K takeover panel rules, on a conference call with analysts Tuesday.

"We are investing in the emerging markets, we are investing in new products, and we are positioning ourselves for what I would call a slow, steady recovery," he said.

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Hopes that the economy can sustain its recovery drew support Wednesday from news that industrial output rose for a seventh straight month and house construction hit a six-month peak in January.

Analysts cautioned, though, that the gains could falter if consumer demand weakened.

The report on industrial production from the Federal Reserve showed gains in all three major categories: manufacturing, mining and utilities.

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HoliMont Ski Resort is planning a $20 million expansion – the largest in its history – to increase the number of residential units surrounding the recreational complex.

Ultimately, the development calls for construction of 93 single-family homes, 72 condominiums, a 27,000-square-foot main chalet, several new slopes and lifts and a new outdoor skating rink. The work is expected to be done in phases during the next few years.

“We’re going to be cautious, and we definitely don’t want to put HoliMont at risk,” General Manager David Riley said.

The project follows the December opening of the $40 million Tamarack Club condo and hotel complex at Holiday Valley Ski Resort.

Between the two resorts, more than $60 million has been or soon will be invested in Ellicottville, which attracts not only Western New Yorkers but people from Ontario, Ohio and Pennsylvania.

“It’s encouraging,” said Corey Wiktor, executive director, County of Cattaraugus Industrial Development Agency. “HoliMont and Holiday Valley continue to work on projects that help refine and define their respective resorts.”

Despite a sluggish national economy, Riley said he is confident the demand is there for residential units – particularly those that allow buyers to “ski in and ski out” of HoliMont.

Last week, a 6,000-square-foot home in the Greer Hill subdivision that borders HoliMont’s Greer Hill run sold for more than $1.5 million to a Canadian buyer. The sale price set a record for the Ellicott-ville area.

“You look at sales like that and it tells you and me that there still is a lot of pent-up demand for real estate here,” Riley said, “even in this economy fast cash.”

The leveling off of the Canadian dollar is fueling development projects, as well, according to Wiktor.

“I think you are going to see a lot of investment in Ellicottville because of the Canadian dollar,” he said.

Much of HoliMont’s development will take place not in Ellicottville but in the neighboring Town of Mansfield. Officials there are nearly finished with their reviews.

“We’re definitely in the home stretch when it comes to all of our approvals,” Riley said, adding that he expects work to start this year on the first phase of residential units.

Based on early projections, he estimates it will take six to seven years to finish the residential units.

“The one thing we are not going to do is overleverage our membership and put HoliMont at risk,” Riley said.

Added Wiktor: “Traditionally, Holiday Valley and HoliMont do projects at incremental levels. You never see them biting off more than they can chew.”

HoliMont is the nation’s largest private membership ski resort with 4,400 skiers. More than 40 percent come from Canada and 25 percent come from Western New York. The remainder are from Ohio, Pennsylvania, Rochester and New England.

HoliMont was founded in 1964 as a private ski resort and companion to the larger Holiday Valley. It has more than 50 slopes and nine lifts and is open to the public on most weekdays. Weekends and holidays, it’s limited to resort members and their guests.

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South Korean manufacturers’ confidence rose for the first time in three months after the government raised its economic-growth forecast for Asia’s fourth-biggest economy.

An index measuring expectations for January climbed to 90 from 85 a month earlier, according to a survey of 1,488 manufacturers released by the Bank of Korea today in Seoul. A measure of non-manufacturing companies’ expectations was unchanged at 84 for the third straight month.

The economy will expand about 5 percent in 2010 after growing 0.2 percent this year, the Ministry of Strategy and Finance said this month, raising its forecasts. The country posted a current-account surplus for a 10th month in November, the central bank said yesterday.

South Korea’s economy expanded 3.2 percent in the third quarter, the fastest pace in seven years, boosted by exports and local spending. Overseas shipments will increase 9.3 percent in 2010, after declining 0.1 percent this year, the Bank of Korea said on Dec. 11.

Today’s report showed an index measuring the outlook for exports gained to 104 from 98 a month ago, and a gauge for the domestic sales outlook in January rose to 100 from 98.

The Bank of Korea surveyed the manufacturers and 802 non- manufacturers between Dec. 14 and Dec. 21.

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The fourth of November was a big day for Jeff Andrews. It also signalled a bold new direction for one of Canada’s largest auto parts makers.

The president of Pro-Power and Energy Ltd. of Port Hope spent a good part of that day driving to Detroit, where he got together with Ken Rossman, an American who manages new business deals for Ontario auto parts manufacturer Linamar Corp.

It was there, ironically on U.S. soil, that the two men signed a 10-year supply agreement that committed Linamar to manufacturing a new – and the first – made-in-Ontario wind turbine at the company’s headquarters in Guelph.

Specifically, Linamar will be making a 2-megawatt "nacelle," the heart and brains of a wind turbine that houses all the mechanical gear used to generate electricity.

CWind Inc. of Owen Sound designed the device, and in partnership with Pro-Power has set up separate companies – WindPro and WindBlade – to manufacture the towers that will hold the massive Linamar-made machines, as well as the blades that connect to them.

"It’s all signed, sealed and delivered," says Andrews, adding that the agreement is a big one for Linamar. "We’re talking about $3.6 billion in orders for them over 10 years."

Not bad for a company that reported $2.3 billion in revenues in 2008. Linamar, like other companies that have depended heavily on the auto industry, is diversifying its customer base. And the energy sector – the greener the better – is what’s capturing their attention.

Aurora-based auto parts giant Magna International is producing electric bicycles, for example, and in October signed an agreement to manufacture, through subsidiary Cosma International, solar equipment for California start-up SkyLine Solar.

Two other auto parts entities – Meikle Automation Inc. of Kitchener and Markham-based Woodbine Tool & Die – have picked up business in the solar PV market as well.

Linamar, in many ways, is leading the pack. It expects its energy-related business will grow to about $1 billion annually within the next 10 years, up substantially from roughly $50 million in 2008.

Chief executive officer Linda Hasenfratz says the company’s revenue stream has already grown by 50 per cent this year, much of it through making wind-turbine parts and production equipment for the European market.

The company also makes engines that generate power from solar heat, part of a deal with Scottsdale, Ariz.-based Stirling Energy Systems.

But the deal with CWind and Pro-Power potentially puts Linamar on a different plane.

If the new wind turbine is successful, it stands to become a lucrative chunk of the company’s multibillion-dollar manufacturing operation.

"When we came upon CWind, we saw a much bigger opportunity, that of producing the entire nacelle. This is a much larger contribution to the wind turbine than we’ve done in the past," says Hasenfratz.

The stars, in a way, are aligning for the 43-year-old company. As the wind industry grows, so, too, are the wind turbines being developed. The bigger the turbine, the more efficient it is at converting wind energy into electricity.

The largest to date stands nearly 200 metres tall and has a blade-to-blade diameter of 126 metres. Nacelle, blades and tower together can weigh more than 300 tonnes.

These massive sizes, however, create huge challenges for turbine manufacturers based in Europe and parts of Asia that are looking to serve the North American market.

"When you look at products of this significant size, the logistics and cost of shipping are really prohibitive, so you’re almost forced to go local," says Hazenfratz.

"If oil prices go up, fuel prices go up, and then it becomes less cost-effective to ship product thousands of kilometres."

Linamar also plans to capitalize on new rules in Ontario that require wind and solar equipment to have a certain amount of local content paydayloans. Add to that generous incentives in the province for developing green-energy projects and the timing for introducing the CWind turbine couldn’t be better.

Already, CWind has its first two years of production pre-sold to Ontario-based wind developers, with strong interest also coming from British Columbia, Saskatchewan and as far as Ireland. "The phone is ringing off the hook," says Andrews, adding that Linamar’s involvement has brought credibility to CWind’s design.

This is no ordinary wind turbine, part of the reason Linamar has been so attracted to the project.

"It’s unique in the industry," says Paula Mayor, manager of business development for New World Generation Inc., parent company of CWind. Her father, Paul Merswolke, is co-inventor of the CWind design.

Most utility-scale wind turbines are designed to turn a drive shaft that is connected to a gearbox. The gearbox speeds up the rotation of a second shaft that connects to an electrical generator.

The problem is that gearboxes are heavy and prone to failure under mechanical stress. This leads to higher maintenance costs over the life of the turbine, as well as increased noise as the gearbox wears out.

The CWind turbine eliminates the gearbox altogether. Instead, the drive shaft is connected to a big wheel, similar in shape to a can of tuna. Hugging the wheel are eight tire-lined shafts, each connected to its own electrical generator. As the big wheel turns, it spins the smaller shafts.

If the wind is light, some of the shafts can be moved away from the wheel to reduce friction. As the wind picks up, more shafts hug the wheel to capture the additional friction energy.

It’s a simpler, more efficient design that has been validated by two independent engineering firms. It has also been demonstrated on a small 65-kilowatt prototype.

"Linamar’s engineers were impressed as they poured over the data and the drawings," Mayor recalls.

Between now and March 2011, the companies will work together to develop a 2-megawatt prototype and two pre-commercial turbines, which must be tested for six to eight months before being certified. After that, commercial production will begin.

Linamar’s merger in 2003 with the engineering firm McLaren Performance Technologies, of Formula 1 auto racing fame, will come in handy. The Michigan-based engineering group hopes to do with CWind what it did for the solar engine it developed for Arizona’s Stirling Energy.

Charles Andraka, a project engineer at Sandia National Laboratories, a U.S. Department of Energy research centre in New Mexico, says Linamar took the early solar engine design and improved it dramatically. Both old and new models have been tested at Sandia’s solar research facility.

"They took a lot of weight out of the system and simplified it quite a bit," says Andraka. "The engine was completely redesigned."

Linamar’s important role in re-engineering these technologies explains, in part at least, why it increasingly wants to put its own stamp on the final product.

In the case of CWind’s nacelle, the supply contract stipulates that the machine be clearly marked "Powered by Linamar." It follows the same marketing logic as the "Intel Inside" logo on computers that made chipmaker Intel Corp. a household name.

That’s just fine with Mayor, who is more than happy to have Linamar use the CWind design as a springboard for new business, particularly at a time when European wind-turbine makers are eyeing the North American market.

"They’re our main supplier of the nacelle. They bring capability to the table, and they bring reputation to the table," Mayor says. "They are moving into this industry and they want to be recognized."

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Federal Reserve Chairman Ben S. Bernanke said the central bank will be prepared to tighten monetary policy when the outlook for the economy “has improved sufficiently.”

“My colleagues at the Federal Reserve and I believe that accommodative policies will likely be warranted for an extended period,” Bernanke said at a Board of Governors conference yesterday in Washington, echoing language from last month’s meeting of the Federal Open Market Committee. “At some point, however, as economic recovery takes hold, we will need to tighten monetary policy to prevent the emergence of an inflation problem down the road.”

The Fed chairman didn’t enter into the debate among his colleagues on the FOMC over the pace or timing of a change in monetary policy. Fed Governor Kevin Warsh said Sept. 25 interest rates may need to rise “with greater force” than usual, while New York Fed President William Dudley said Oct. 5 the recovery’s pace “is not likely to be robust” and inflation risks are “on the downside.”

The FOMC reiterated its pledge last month to keep the benchmark lending rate at around zero “for an extended period” to boost a weak recovery that has yet to create jobs. The unemployment rate rose to 9.8 percent last month, the highest level since 1983. Bernanke didn’t discuss the outlook for the economy in his prepared remarks, which outlined the Fed’s response to the financial crisis.

‘More Pointed’

“He could not have been more pointed when reminding his worldwide audience that the low-rates promise is conditional,” said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “Money is free and easy right now, and the minute the job losses halt, you can bet the Fed will stop talking about exit strategies, including lifting the Fed funds rate, and start implementing them.”

Any move to tighten policy over the next year may run into opposition from the White House, which has said it doesn’t want to end fiscal or monetary stimulus quickly, the New York Times reported today, without citing anyone.

The Fed chairman, responding to an audience question about the effect of the $787 billion fiscal stimulus package on monetary policy, said he is assessing the impact of the spending on growth.

Capacity

“Looking at the amount of excess capacity in the economy, looking at the low rate of inflation, we believe that conditions will warrant policy accommodation for an extended period,” he said.

Bernanke’s comments come as a global recovery prompts officials around the world to debate the timing of exit strategies. Australia raised rates this week, the first Group of 20 nation to do so since the crisis intensified a year ago. Bank of Japan Governor Masaaki Shirakawa said Oct. 3 the need for the bank’s corporate bond purchase programs has eased.

In Europe, the Bank of England and the European Central Bank both kept rates unchanged yesterday and have signaled little willingness to immediately rein back emergency measures. China’s banking regulator, Liu Mingkang, said in Hong Kong today it’s “ far too early to talk about an exit.”

The U.S. currency strengthened to 89.29 yen as of 9:13 a.m. in Tokyo from 88.39 yen in New York yesterday, while it has dropped 0.6 percent this week. The dollar climbed to $1.4725 per euro from $1.4794, paring its decline on the week to 1 percent.

Stocks Gained

U.S. stocks gained as Alcoa Inc. started the earnings season with an unexpected profit and jobless claims decreased more than forecast. The Standard and Poor’s 500 Index rose 0.8 percent to 1,065.48. Yields on U.S. 10-year notes increased 8 basis points to 3.26 percent. A basis point is 0.01 percent.

The Fed staff is fine-tuning mechanisms designed to drain or neutralize excess cash in the banking system following a doubling of the central bank’s balance sheet. Those tools range from paying interest on bank reserves deposited at the Fed to reverse repurchase agreements, where the Fed pulls cash out of the financial system through a temporary sale of securities.

Bernanke said in the question-and-answer period the Fed could also conduct reverse repurchase agreements with Fannie Mae and Freddie Mac to soak up their excess cash balances guaranteed payday loan.

Money Growth

U.S. central bankers boosted their balance sheet by $1.2 trillion after the collapse of Lehman Brothers Holdings Inc. in September 2008. The Fed has provided emergency credit to markets for commercial paper and asset-backed securities, expanded loans to banks and financed a $30 billion pool of high-risk securities to facilitate the merger of Bear Stearns Cos. with JPMorgan Chase & Co.

The Fed chairman said the bank reserves created through these operations haven’t created growth in broader measures of money. Still, he said Fed actions have improved liquidity and reduced lending spreads, two measures of success for a policy he calls “credit easing.”

“The unstinting provision of liquidity by the central bank is crucial for arresting a financial panic,” Bernanke said. “By backstopping these markets, the Federal Reserve has helped normalize credit flows for the benefit of the economy.”

To keep longer-term interest rates low, the Federal Open Market Committee is also conducting a $1.75 trillion purchase program of Treasury, housing agency and mortgage-backed securities.

Lower the Cost

“The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses,” Bernanke said. “The programs appear to be having their intended effect.”

The average rate on a 30-year fixed-rate mortgage fell to 4.87 percent, the lowest since May, Freddie Mac said yesterday. The Fed’s auctions of term loans to banks are also reducing pressures in the market for interbank loans.

The Fed won’t begin raising interest rates until the third quarter of 2010 as the recovery is likely to be too weak to lift employment and incomes, according to a September survey of 57 economists by Bloomberg News.

Richmond Fed President Jeffrey Lacker told reporters at a separate event in Washington yesterday that the risk the economy will slide back into recession “has diminished substantially” yet is “not entirely zero.”

Lacker also said Oct. 1 in a Bloomberg Radio interview that the growth and consumer spending outlook are “more fundamental” to the decision on when to tighten than “labor- market conditions.”

‘Extended Period’

Fed Governor Daniel Tarullo said yesterday in a speech in Phoenix that the strength of the U.S. recovery shouldn’t be exaggerated, while reiterating that rates are likely to remain low for “an extended period.”

“This turnaround is certainly welcome, but it should not be overstated,” Tarullo said. “Although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak.”

The economy will expand at a 2.2 percent annual pace this quarter, the economists estimated. Housing markets have stabilized and manufacturing is picking up as companies re- stock lean inventories. Employers cut 263,000 jobs in September, pushing the unemployment rate up to 9.8 percent.

“The unemployment rate is much too high and it seems likely that the recovery will be less robust than desired,” New York Fed President William Dudley said Oct. 5. “This means that the economy has significant excess slack and implies that we face meaningful downside risks to inflation over the next year or two.”

Six Straight Months

Consumer prices have fallen for six straight months from year-earlier levels, the longest stretch of declines since a 12- month drop from September 1954 to August 1955, according to the Labor Department.

The core consumer-price index, which excludes food and energy, rose 1.4 percent in August from a year earlier, down from a 2.5 percent increase in September 2008.

“There is still downward pressure on core inflation and with the unemployment as weak as it is, there is a lot of room, as the Fed sees it, to maintain exceptionally low interest rates,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. LLC.

– With assistance from Gabi Thesing in Frankfurt. Editors: James Tyson, John Fraher

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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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