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7 Oct

Rates will continue at record lows into 2011

General

Posted by: Angela Calla

Reuters

MBA Mortgage Applications —

The number of mortgage applications in the U.S. declined for a fifth straight week, led by a drop in refinancing despite mortgage rates dropping to a record low. The Mortgage Bankers Association’s index decreased 0.2% for the week ended Oct. 1. Refinancing fell to an eight-week low, while purchases increased by the most since April.

LONDON – The Bank of England left interest rates at 0.5% for a 20th consecutive month on Thursday and kept its asset-buying program on hold, but the outcome probably masked a vigorous debate about whether economic conditions require tighter or looser policy. The unchanged interest rate verdict was predicted by all 61 economists in a Reuters poll. Most economists expect rates to stay at 0.5% until well into 2011 and only around a third think the bank will extend its quantitative easing program — capped at 200 billion pounds in February — in the future.

Currency war could be latest threat to global recovery

By Julian Beltrame, The Canadian Press  OTTAWA — The prospect of “an international currency war” that could spill over into trade protectionism is adding a new threat to the global recovery, Canadian, U.S. and other officials warned Wednesday.

The issue appears to be coming to a head in advance of Friday’s finance meetings in Washington involving the G7 countries and the International Monetary Fund, with several major players demanding action.

“There is a danger here that countries that have currencies that trade freely are disadvantaged by certain interventions that are made by other countries, and by inflexibility by certain currencies,” federal Finance Minister Jim Flaherty told reporters.

“We don’t want these kinds of distortions in currency values or distortions in trading relations.”

Earlier in the day, U.S. Treasury Secretary Timothy Geithner was far blunter, calling out countries like China that have built a powerful export-based economy on what critics believe are artificially depressed currencies.

For example, a low yuan not only makes Chinese products more attractive in countries like the U.S. and Canada but also discourages imports from those countries while making their domestic manufacturers less competitive even in their own markets.

Geithner said countries with large trade surpluses must let their exchange rates rise or risk a dangerous game of chicken.

“When large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same,” he said.

He said the issue is so critical that the call by emerging countries for a bigger role at the IMF should be tied to their willingness to adopt more flexible exchange rates.

“I think Mr. Geithner has a point,” said Flaherty.

A form of tit-for-tat on exchange rates has already begun. Japan recently sold yen to cut its value, and Tuesday sliced its policy interest rate to zero, which will also have the effect of undermining the currency.

Brazil, which was one of the first raise the alarm over what it called a brewing “international currency war,” has doubled a tax on bonds purchased by foreign sources in an effort to rein in its strong currency.

Even the United States has been accused of using quantitative easing — printing money — to deflate the greenback.

The moves helped lift the Canadian dollar to a five-month high Wednesday as it once again threatens to reach parity with the U.S. dollar. In afternoon trading, the loonie briefly rose above 99 cents US before settling up 0.59 of a cent at 98.94 cents US.

“There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” IMF managing director Dominique Strauss-Kahn was quoted as saying Wednesday. “Translated into action, such an idea would represent a very serious risk to the global recovery.”

Bank of Montreal economist Douglas Porter believes the bigger danger may be in the rhetoric than the reality, particularly if countries like the U.S. trigger a far more punitive trade war.

In Washington, Congress is moving forward with legislation that would essentially impose duties on exports from China to compensate for the low yuan.

At the heart of the frustration is that one year out of recession, most advanced economies are still in first gear, and braking, while emerging countries are speeding ahead.

An IMF report issued in advance of Friday’s meetings highlighted the bi-polar world. It predicts growth in the developing world, led by China, will expand at a 7.1 per cent clip this year and 6.4 next, compared with 2.7 and 2.2 per cent among advanced economies.

The issue could get ugly in November when the G20, which includes countries like China and Brazil, meets in Seoul, South Korea, to finalized plans for financial system and economic reform.

Prior to the Toronto summit in June, China announced it was prepared to allow the yuan to appreciate slightly, but it barely moved. Since the U.S. threats of retaliation, it has appreciated about 1.7 per cent.

That will hardly appease critics, given that some place the undervaluation at as much as 40 per cent.

Flaherty said all countries had agreed to implement reforms at the Toronto summit in June, including fixing global imbalances, and now need to fulfil their promises.

“We have to make sure people stay on the right track,” he said. “The timing of this weekend’s meetings, once again, is prescient.”