Bank of England Cuts 150bp - King Rises to the Task

It is almost as if there is a new man in town at the BoE. Yesterday, I argued that the BoE could cut by 100bp and they even blew away that outside expectation.

Earlier this year, Mervyn King was still being criticized for being behind the curve. A month ago, he shed that image by announcing plans to take equity stakes in banks. King realizes that he has a seismic challenge ahead of him and today's move confirms that the economy is in a recession. This has compelled the BoE to take an insurance out on future growth by making a much larger than expected rate cut.

UK interest rates are now at 3.00%, the lowest in 55 years! What makes today's move even more groundbreaking is the fact that the BoE has never cut by more than 50bp since it was granted independence, and did not cut by more than 100bp even during the last recession in the early 1990s. King is sending a strong message to the markets that they can trust him to proactively fight off the recession.

Why Did the GBP Rally?

Interestingly enough, even though the British pound collapsed following the rate decision, it recovered dramatically in the minutes following the release. With every major central bank taking interest rates towards zero to 1 percent, the BoE's move today restored confidence in the UK monetary policy committee. They have delivered a significant stimulus to the UK economy and the currency market is happy with it. We would not rule out further rate cuts by the Bank of England, but certainly not by the same degree that we have seen today.

Swiss National Bank Cuts Rates by 50bp

Lost in the fanfare of the BoE and ECB rate cuts today, was the 50bp rate cut by the Swiss National Bank. The target range for interest rates is now 1.5 to 2.5 percent. The central bank is concerned about growth and suggested that it may even be negative next year. This tells us that they are also looking forward to further rate cuts.

Kathy Lien
http://www.gftforex.com

DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.

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ECB Disappoints with 50bp Cut, Trichet's Comments

It is the morning for rate cuts with the European Central Bank, Bank of England and the Swiss National Bank all cutting interest rates. On a day when the Bank of England shocked the markets with a 150bp rate cut, the ECB and the SNB's half point cut seemed very small in comparison.

Every major central bank is worried about growth but not as worried as the ECB. Unlike King who openly admitted that the economy is in a recession, when asked the same question, Trichet simply said “we will see.” On future rate cuts, he said that the ECB never pre-commits . If Trichet was serious about cutting interest rates aggressively, he would not be qualifying his comments on inflation and future rate cuts.

In his post meeting press conference, ECB President Trichet was not as bearish as he could have been given the sharp deterioration in growth.

He spent the majority of his time discussing inflation and how it is set to ease but skirted over growth and the economic outlook. Larger rate cuts was discussed but the decision to cut by 50bp to 3.25% was unanimous. Compared to the BoE, the ECB's tone is less dovish.

The ECB is a much more conservative central bank and it is clear that their monetary policies are more restrictive. They have only cut rates by 75bp this year when taking into account their rate hike in July.

More rate cuts will come from the ECB, but Trichet's comment about not pre-committing to rate cuts indicates that they will not be making rate cuts in excess of 100bp like the BoE. Trichet feels that he has already done a lot by cutting interest rates twice in 1 month.

The sharp divergence in the actions taken by the ECB and the BoE today should help the Euro recover against the British pound.

Kathy Lien
http://www.gftforex.com

DISCLAIMER: GFT refers to Global Futures & Forex, Ltd. and all of its divisions, branches and subsidiaries, including Global Forex Trading and GFT Global Markets UK Limited. GFT Global Markets UK Limited is authorized and regulated by the United Kingdom Financial Services Authority. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful. Trading of foreign exchange contracts, contracts for differences, derivatives and other investment products which are leveraged, can carry a high level of risk, and may not be suitable for all investors. It is possible to lose more than the initial investment. In Australia, GFT means Global Futures & Forex, Ltd. ARBN 103 508 461, AFS Licence 226625. A Product Disclosure Statement (PDS) is available at www.gft.com.au. You should read and consider the PDS before making any decision to deal in GFT products. © 2008 Global Futures & Forex, Ltd. All rights reserved.

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BoE Scrambles With Shocker Cut

Bank of England shocks with with a 150-bp rate cut to 3.00% (lowest level since 1954), against expectations of 50-bp cut, making the biggest rate cut since the central bank acquired operation independence 11 years ago. The Swiss National Bank also surprised in an unscheduled meeting with a 50-bp rate cut to 1.75%. Sterling collapsed by a full 2 cents in less than 3 minutes to $1.5710 before jumping back by more than 3 cents towards $1.6020 and later dropping back towards $1.5850s, as surging volatility widens price spreads and impacts liquidity.

The European Central Bank did not surprise as it reduced its refinancing rate by 50-bps to 3.25%. ECB's president JC Trichet will deliver the post-announcement press conference at 8.30 am EST.

US Weekly Jobless Claims rose to 481K vs expectations of 477K.

The UK 's National Institute of Economic and Social Research estimated Q3 GDP to have contracted by 0.5% from an initial estimate of a 0.2% contraction, expecting the downturn will last into 2010.

The magnitude of today's interest rate moves not only reflect the gravity of the financial and economic dangers in Europe and their impact on the rest of the world, but also manifest the lateness of UK central bank policy makers, whose inflation-focus had clouded their ability to weigh the depth of the recession. Despite having acquired operational in May 1997, the Bank of England was bound to a government-imposed inflation target (not ceiling as in case of ECB), now at 2.0%.

Pre-US Jobs Central Bank Action? The global fallout from yesterday's 5% slump in Wall Street ought to have played a role in forcing the hand of the BoE into making today's historic move. Tomorrow's US non-farm payrolls for October are expected to show a loss of more than 220K (biggest since November 2001), while the unemployment rate hitting a fresh 5-year high of 6.3%. Considering the momentum of sectoral employment deterioration , we expect a payrolls decline of as much as 310K. An unemployment rate above 6.3% would be the highest since 1994. Yesterday's ADP report on private payrolls showed a decline of 157K in October (highest since Nov 2002). The impact on US and global markets of such a report could be of escalating volatility, favoring the lower yielding currencies. We continue to expect USDJPUY will not reach its cyclical low until end of 2009, early 2010 at 77 yen.

Ashraf Laidi
http://www.ashraflaidi.com

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Central Banks in Europe Exciting This Market

Daily Forex Fundamentals | Written by Black Swan Capital | Nov 06 08 13:56 GMT |

Currency Currents Key News Bank of England Cuts Interest Rate by 1.5 Points to Lowest Level Since '55 (Bloomberg) The European Central Bank cut its main lending rate by 50 basis points. (Bloomberg) Quotable "Doubt is not a pleasant condition but certainty is an absurd one.” Voltaire FX Trading - Central Banks in Europe Exciting This Market Today is interest rate day! That is, the Bank of England and the European Central Bank culminate their most recent monetary policy discussions and announce changes to their benchmark interest rates. The BOE actually just decided to cut rates a full percentage point, i.e. 150 basis points. This was a surprise. The ECB cut 50 basis points and did not surprise. But this still goes very much to the point that things are getting awfully rotten in the UK and European economies. I started writing today's Currency Currents before either bank had made their announcement, and here's what I had jotted down ... Consensus expects a cut of 50 basis points from each of them. I wouldn't be too surprised if they cut by a larger margin. But as quickly as things have turned sour in these economies, they probably still want to avoid forcing rates down too quickly. Besides, they'll probably be at this a while longer. They've got plenty of time to chisel away a considerable chunk or their interest rates. Ultimately, a cut of 50 basis points ... 25 basis points ... or 75 basis points ... and what we expect will be an ongoing easing campaign will put a hurting on the currency of the respective banks. Only that hurting may not be felt right away. But it could ... Ha ... sure could alright! But I didn't expect it! Turns out, there was some immediate hurt being felt. Actually, when it comes to those trading the British pound, there was probably a lot of immediate pain being felt within the first 30 minutes after the rate cut. Within the first 11 minutes following the announcement by the BOE, the British pound had plunged roughly 140 PIPs. That's a huge move. But within minutes the drop was retraced, and in the 10 or so minutes that followed the British pound surged by roughly 150 PIPs. Talk about a washout. That's a brutal 30-minute, 300+ PIP range. This is far more up-to-the-second reaction than we've been seeing in the wake of recent rate decisions from global central banks. But this time is different perhaps because there's been a lot of sideways, wishy-washy trading over recent days ... at least for the currencies ... Let's Go to the Charts for Some Clarity Despite the big moves this morning, little has been resolved in the way of a continued correction versus a resumption of the primary trend. So we turn to the charts ... Looking at recent daily action, a chart of the euro and British pound show similar patterns. That narrowing wedge pattern seen in the following chart of the euro is what's often referred to as a bearish pennant. And what this particular pattern signifies is pent-up momentum. The euro isn't fairing well after this morning's bank decisions. What we'd expect is for prices to exit this wedge and move powerfully in the same direction as price action leading into the wedge, which would be down. Should we see a sharp breakdown through the lower bound of this pennant formation it could mean two things: First, a test of the lows from October 28 would be in the cards. And second, depending on how the euro handles these lows, we could determine whether the next powerful drop might follow. Of course, at that point we would assume the US dollar will have compensated for its corrective move and is following through on the rally it started back in July. We will be watching ... Jack Crooks Black Swan Capital http://www.blackswantrading.com Black Swan Capital's Currency Snapshot is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to futures or forex should be strictly the money you can afford to risk. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html

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Daily Forex Fundamentals | Written by CurrencyThoughts | Nov 06 08 13:51 GMT |

The Swiss National Bank Cuts Rate Target Midpoint by 50 Basis Points to 2.0% Swiss monetary officials acted outside of a scheduled quarterly meeting for the second time in a month. The new LIBOR target range becomes 1.5-2.5%, with a point target of 2.0%. The Swiss on October 8th had implemented a 25-bp reduction, moving less than other central banks in that concerted move. The cyclical peak rate of 2.75% had been kept previously from September 13, 2007 until October 8, 2008 and had been reached following ten increases of 25 basis points each between June 2004 and September 2007. On October 8th, Swiss officials had said that growth in their economy would be weaker next year than assumed in their most recent quarterly policy assessment made this past September. Today’s statement escalates that warning to admitting that "growth in 2009 might even be negative." This recession, in conjunction with the appreciation of the franc and lower oil costs, reinforces "the expected drop in inflation." As the ECB implements more rate reductions beyond today’s, so will the Swiss National Bank in order to guard against excessive exchange rate strength that could aggravate the downturn. Today’s statement by the SNB ends with a promise to keep a close watch on the franc’s movements. Larry Greenberg CurrencyThoughts

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U.K. October House Prices Drop Most in 25 Years

By Brian Swint

Nov. 6 (Bloomberg) -- U.K. house prices fell at the fastest pace in at least 25 years, strengthening the case for the Bank of England to lower interest rates today, HBOS Plc said.

The average cost of a home dropped 14.9 percent from a year earlier in October, the most since the index began in 1983, Britain's largest mortgage lender said in a statement. From September, prices fell 2.2 percent, the ninth straight monthly decline.

The seizure in credit markets has left Britain on the brink of its first recession since 1991. The economy contracted in the third quarter and unemployment increased to the highest level in almost two years in September. The U.K. central bank will lower the key rate by at least half a point today, economists say.

``The market will remain under pressure going into a severe economic downturn,'' Martin Ellis, chief economist at HBOS, said in an interview. ``Interest rate reductions will help to improve confidence. I wouldn't be surprise to see a big one today.''

The U.K. economy shrank 0.5 percent in the three months through October, the National Institute of Economic and Social Research said in a separate report today. The European Commission forecast this week that the U.K. will contract 1 percent in 2009, the most among leading industrial nations.

U.K. house prices, which tripled in a decade, will fall 30 percent from their October 2007 peak over three years, Fitch Ratings said yesterday. U.K. mortgage approvals stayed close to the lowest since at least 1999 in September after the worsening financial crisis prompted banks to tighten lending and deterred potential buyers, the central bank said Oct. 29.

Rate Cuts

The average house price in the three months through October was 13.7 percent lower than a year earlier, also the steepest decline in a quarter century, HBOS said. At 168,031 pounds ($268,000), prices are now at the same level as in October 2005.

The Bank of England cut the benchmark lending rate by a half point on Oct. 8 in an emergency move with six other central banks.

It will probably lower it by the same amount today to 4 percent, said 45 of the 60 economists in a Bloomberg News survey. Nine predict a cut of 1 percentage point and six said the bank will reduce by 75 basis points. The central bank announces the decision at noon.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net.

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U.S. Initial Jobless Claims Rose Higher Than Forecast

By Timothy R. Homan

Nov. 6 (Bloomberg) -- More Americans than anticipated filed first-time claims for unemployment benefits last week and total jobless rolls climbed to the highest level in 25 years, indicating further deterioration of the labor market.

Some 481,000 workers filed initial claims in the week ended Nov. 1, the Labor Department said today in Washington, exceeding the 477,000 projected by economists surveyed by Bloomberg News. The number of people staying on benefit rolls was the most since February 1983.

Companies are facing reduced access to credit alongside the biggest slowdown in consumer spending in 28 years. The government may report tomorrow that the economy lost 200,000 jobs in October, the most in five years and bringing the total drop so far this year to almost 1 million.

``The underlying trend in claims is rising, and we'll see confirmation tomorrow that the job market is deteriorating rapidly,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``Consumer spending will continue to fall sharply. This recession will be substantially deeper than the last two.''

The economists' forecast was based on the median of 39 projections in the Bloomberg survey. Estimates ranged from 460,000 to 491,000. The prior week's claims were revised up to 485,000 from an initially estimated 479,000.

Credit Losses

Standard & Poor's 500 Index futures declined 1.9 percent while the MSCI World Index lost 2.4 percent to 959.52 at 1:33 p.m. in London, extending this year's decline to 40 percent. More than $27 trillion has been erased from the value of global equity markets as credit losses and writedowns exceeded $690 billion in the worst financial crisis in seven decades.

The hurricanes that hit the Gulf Coast earlier this year are no longer having a ``significant'' influence on claims, a Labor spokesman said.

Separately, the Labor Department reported that worker efficiency rose in the third quarter at a slower pace than in the previous three months as the economy slumped, a sign employment may take a bigger hit.

Productivity, a measure of employee output per hour, rose at a 1.1 percent annual rate, more than forecast. Labor costs climbed at a 3.6 percent pace, also more than anticipated.

The four-week moving average of initial claims, a less volatile measure, was unchanged at 477,000. So far this year, weekly claims have averaged 398,000, compared with an average 321,000 for all of 2007.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, increased to 2.9 percent, the highest level since 2003. These data are reported with a one- week lag.

New Claims

Forty states and territories reported an increase in new claims, while 13 reported a decrease.

Initial jobless claims reflect weekly firings and tend to rise as job growth -- measured by the monthly non-farm payrolls report -- slows.

The economy probably lost 200,000 jobs in October, the most this year, according to economists surveyed by Bloomberg before the Labor Department report set for Nov. 7. The unemployment rate may jump to its highest level in more than five years, the survey showed.

Companies are trimming staff to offset a slowdown in consumer spending. GlaxoSmithKline Plc, Europe's largest drugmaker, said yesterday it will eliminate 1,000 sales positions in the U.S. to cut costs.

The company said revenue in the U.S. last quarter dropped 13 percent.

Consumer spending declined at a 3.1 percent annual pace during the third quarter, the first decrease since 1991 and the biggest since 1980, the Commerce Department said Oct. 30.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

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U.S. Productivity Growth Slowed in Third Quarter

By Shobhana Chandra

Nov. 6 (Bloomberg) -- U.S. worker efficiency rose in the third quarter at a slower pace than in the previous three months as the economy slumped, a sign employment may take a bigger hit.

Productivity, a measure of employee output per hour, rose more than forecast at a 1.1 percent annual rate, the Labor Department said today in Washington. Labor costs climbed at a 3.6 percent pace, also more than anticipated.

The figures, coming a day before the government's October payrolls report, signal companies may accelerate firings in an effort to trim expenses as the economy heads into a deeper slump. A weakening labor market will contain wage pressures, reinforcing the Federal Reserve's forecast that inflation will moderate.

``Firms can't quite keep up with how quickly demand is falling, though they're reacting quickly by cutting employment and hours,'' said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts. ``It makes things worse for the job market. We'll see weaker productivity in the next couple of quarters.''

Treasuries were little changed, with the benchmark 10-year note yielding 3.71 percent as of 8:59 a.m. in New York, up 1 basis point from yesterday. Stock-index futures were lower.

Labor costs increased at a 3.6 percent pace, after a revised second-quarter decline of 0.1 percent.

Economists had forecast productivity would rise at a 0.7 percent annual pace, according to the median of 63 forecasts in a Bloomberg News survey. Estimates ranged from a gain of 2 percent to a decline of 0.5 percent. Unit labor costs, which are adjusted for efficiency gains, were projected to increase 3 percent.

More Claims

A separate report showed more Americans than anticipated filed first-time claims for unemployment benefits last week and total jobless rolls climbed to the highest level in 25 years, indicating further deterioration of the labor market.

Hours worked fell at a 2.7 percent pace, the most in six years. Output fell at a 1.7 percent rate, the biggest drop since the 2001 recession.

Compensation for each hour worked climbed at a 4.7 percent annual pace, up from a 3.5 percent rate in the prior quarter. Adjusted for inflation, compensation was down 1.3 percent from a year ago, the biggest 12-month drop since 1995.

Compared with the third quarter of 2007, productivity rose 2 percent, down from a 3.2 percent gain in the 12 months ended in June.

A Labor Department report tomorrow is projected to show the economy lost an additional 200,000 jobs in October, according to the survey median, bringing the total decline in payrolls to almost 1 million so far this year.

Falling Output

Non-farm output last quarter dropped at a 1.7 percent pace, almost as much as the decline in hours worked, leading to the slowdown in productivity. The economy overall shrank at a 0.3 percent pace from July to September, the most since the 2001 recession.

Some economists are concerned that the productivity surge that began in 1996 is waning.

In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

Cutting Staff, Hours

Still, as sales slow, companies are redoubling efforts to protect profits by cutting staff and workers' hours to boost productivity and reduce expenses. Dell Inc., the world's second- largest personal-computer maker, this week said it is offering unpaid leave to workers and severance packages to employees who voluntarily quit their jobs.

Airlines are among the companies focused on lowering expenses as fuel costs remain elevated and consumers cut back on travel. AMR Corp.'s American Airlines has said it is shrinking U.S. routes for its main jet operations by as much as 12 percent as it parks more than 100 planes and trims the workforce by 8 percent, or about 6,840 jobs.

``Airlines are not generating enough revenue to cover their costs,'' AMR's Chief Executive Officer Gerard Arpey said in an interview this month. ``We're going to be very cautious about our capacity for next year.

To contact the reporter on this story: Shobhana Chandra in Washington at schandra1@bloomberg.net

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IMF Forecasts Contractions in U.S., Europe, Japan Next Year

By Christopher Swann

Nov. 6 (Bloomberg) -- The International Monetary Fund predicted economic contractions in the U.S., Japan and euro region next year, calling for further interest-rate cuts and fiscal stimulus.

``Markets have entered a vicious cycle of asset de- leveraging, price declines and investor redemptions,'' the IMF said in an update to its World Economic Outlook report, released in Washington today. ``Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth.''

The revisions reflect a further choking-off of credit to companies and businesses in the past month. The Bank of England today declared the most serious banking ``disruption'' in almost a century, cutting its benchmark interest rate to the lowest level since 1955.

U.S. gross domestic product will contract 0.7 percent, Japan's will shrink 0.2 percent and the euro area's 0.5 percent in 2009, the IMF said today in Washington. The fund last month foresaw 0.1 percent U.S. growth, with expansions of 0.5 percent in Japan and 0.2 percent in the euro zone.

Global growth will be 2.2 percent next year, down from 3.7 percent this year, the IMF said. The fund said in its semiannual World Economic Outlook report on Oct. 7 that world GDP would rise 3 percent in 2009. As recently as July, IMF economists expected a 3.9 percent expansion.

The IMF has said that a growth rate of 3 percent or less is ``equivalent to a global recession.''

`Hard Hit'

Growth in the U.S. ``will suffer as households respond to depreciating real and financial assets and tightening financial conditions,'' the IMF said. In Japan, ``growth from net exports is expected to decline.'' The 15-nation euro region will be ``hard hit'' by the slowdown, the fund said.

The IMF also warned today of growing risks of deflationary conditions in advanced economies.

``There is a clear need for additional macroeconomic stimulus relative to what has been announced thus far,'' the fund said. ``Room to ease monetary policy should be exploited, especially now that inflation concerns have moderated.''

As the credit crunch widens, the reversal in major developed countries is spreading to poorer nations, increasing demand for IMF loans.

In emerging and developing countries, GDP in 2009 will increase 5.1 percent, less than the 6.1 percent expansion the fund predicted in October. China's growth will measure 8.5 percent next year, weaker than the 9.3 percent forecast a month ago.

Since the fund produced its forecast in October, the outlook for developing countries has deteriorated as investors shunned their currencies and bonds, sending borrowing costs climbing.

Demand for the fund's emergency loans -- which had slumped in recent years amid a boom in emerging markets -- has surged, with Hungary, Ukraine, Belarus and Iceland all asking for financial help from the IMF.

To contact the reporters on this story: Christopher Swann in Washington at cswann1@bloomberg.net.

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SNB Unexpectedly Cuts Rates, Says Economy May Shrink

By Elena Logutenkova and Joshua Gallu

Nov. 6 (Bloomberg) -- The Swiss central bank unexpectedly lowered its main lending rate by 50 basis points, joining rate cuts by the Bank of England and the European Central Bank, and said the economy may contract next year.

The central bank, led by Jean-Pierre Roth, lowered its three-month Libor target to 2 percent today from 2.5 percent, the biggest reduction in more than five years, it said in a statement from Zurich. The SNB wasn't scheduled to decide on interest rates until Dec. 11. The BOE cut borrowing costs by 150 basis points and the ECB pared its benchmark by 50 basis points.

``It seems the strong move of the BOE might have been discussed among central banks,'' said Stefan Bielmeier, an economist at Deutsche Bank AG in Frankfurt. ``Central banks are trying everything they can to fight the financial crisis.''

Today's action is the SNB's second inter-meeting cut in a month, as the financial market crisis causes stocks to plunge and forces governments to buy troubled assets. UBS AG, Switzerland's biggest bank, got a $59.2 billion aid package Oct. 16 after piling up the biggest losses of any European lender from the global credit crisis.

``The global economic outlook has deteriorated more severely than anticipated, which will impact growth in Switzerland in the next few quarters,'' the bank said. ``The economic slowdown, the decline in the price of oil and the appreciation of the Swiss franc are reinforcing the expected drop in inflation.''

`Extraordinary Measures'

With investors shunning riskier assets and investing in so- called safe-havens, the Swiss franc has jumped more than 5 percent against the euro since Oct. 1. The pace of the franc's appreciation and higher money market rates are a ``big challenge'' for the central bank, Roth said in an interview with the Neue Zuercher Zeitung on Nov. 1.

The franc fell against the dollar after the SNB's announcement, dropping to 1.1730 by 1:59 p.m. from 1.1580 yesterday. It weakened to as much as 1.5072 per euro before reversing losses after the ECB's half-point rate cut.

``Extraordinary times call for extraordinary measures,'' said Reto Huenerwadel, a senior economist at UBS in Zurich. With other central banks acting aggressively, the Swiss franc ``would have gone through the roof'' if the SNB hadn't acted.

The U.S. Federal Reserve last week cut its benchmark to 1 percent from 1.5 percent and signaled it's ready to take rates to the lowest level on record. China and Japan have also reduced rates, and Australia this week slashed borrowing costs by three quarters of a percentage point.

Swiss exports declined for the first time in almost four years in September, manufacturing contracted in October for the second month, and leading indicators slipped to the lowest level in more than five years. With exports drying up and the financial market crisis pounding banks' earnings, Switzerland is seeing two main growth engines falter.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Joshua Gallu in Zurich at jgallu@bloomberg.net

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Trichet Says Can't Rule Out More Cuts as Growth Slows

By Christian Vits

Nov. 6 (Bloomberg) -- European Central Bank President Jean- Claude Trichet said he can't rule out a further reduction in interest rates after today's half-point cut because the global financial crisis may lead to an extended economic slump.

``The intensification and broadening of the financial turmoil is likely to dampen global and euro-area demand for a rather protracted period,'' Trichet said after reducing the bank's key lending rate to 3.25 percent, the second cut in less than a month. ``Price, cost and wage pressures should also moderate. I don't exclude that we will decrease rates again.''

Central banks around the world are paring borrowing costs as the financial turmoil curbs growth. The Bank of England today unexpectedly lowered its key rate by a third to 3 percent and the Swiss central bank followed with an emergency half-point cut. The euro region's economy is probably already in a recession and will stagnate in 2009, the European Commission said this week.

Economists predict the bank will continue to reduce borrowing costs at the most aggressive pace in its 10-year history, taking its key rate to 2.5 percent by April.

``The ECB is coming from this very hawkish tone just one and half months ago and it would have damaged their reputation if they did more than the 50 basis points,'' Carsten Brzeski, an economist at ING Group in Brussels, said before Trichet spoke. ``But ultimately, they will follow.''

Deeper Cut Considered

Trichet said the ECB's rate-setting Governing Council also discussed a 75-basis-point reduction.

Inflation slowed to 3.2 percent in October after reaching a 16-year high of 4 percent in July. The ECB aims to keep the rate below 2 percent. Oil prices have more than halved from a peak of $147 a barrel and inflation expectations have stabilized.

Part of ``the important sentiment we have'' is not only that inflation risks are diminishing, ``there's also been a regaining of the control of inflation expectations.''

Economic growth in the euro area will slump to just 0.1 percent next year, the worst performance since 1993, the Brussels- based European Commission forecast on Nov. 3. It said the economy, which contracted in the three months through June, will probably continue to shrink in the third and fourth quarters.

The International Monetary Fund today predicted economic contractions in the euro region, the U.S. and Japan next year. ``Global action to support financial markets and provide further fiscal stimulus and monetary easing can help limit the decline in world growth,'' the IMF said.

Manufacturing orders in Germany, Europe's largest economy, dropped by a record 8 percent in September, the government said today.

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net

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Bank of England Slashes Key Rate to 3.0% from 4.5%

Daily Forex Fundamentals | Written by CurrencyThoughts | Nov 06 08 13:49 GMT |

The Bank of of England implemented its biggest rate change by far since the period surrounding the run on sterling in September 1992. No move since February 1993 had exceeded 50 basis points, but officials today cut their Bank Rate by 150 basis points to 3.0%. It seems that William Buiter, a former member of the Monetary Policy Committee at the BOE, was not merely speculating earlier today when he urged officials to slash the rate to 3.0%. Officials released an immediate statement in which they asserted that “the risks to inflation have shifted decisively to the downside” as a result of sharply lower commodity prices, the “most serious disruption for almost a century” in the global banking system, sharply tighter money and credit conditions, substantial declines in equity prices, and prospects for a “severe contraction” of output to continue in the near term. No component of private demand — consumption, business investment, housing, and exports — has been spared. Inflation risks have swung to the downside in spite of sterling depreciation, and officials are now warning of a “substantial risk of undershooting the inflation target.” New inflation and growth forecasts will be published November 12th, and minutes from today's meeting, which I expect to show unanimous support for today's action, are due November 19th. The statement implies that rate cutting is not over, asserting that prevailing market rates “contain a substantial risk of undershooting the inflation target.” It is not unreasonable to presume that the bank rate eventually will drop as far as the current fed funds target of 1.0%. Historical footnote: Today's drama still falls short of Black Wednesday (September 16, 1992) when the Bank of England in two steps first hiked the bank rate from 10% to 12% and then to 15% to defend sterling, only to give up and cut the rate back to 12%. On Sept 17th, the rate was lowered another 200 basis points back to 10%, followed by 100-bp further reductions to 9% on Sept 22, 8% on October 16, 7% on November 12th, and 6% on January 26, 1993, which was the last time that officials did a move of more than 50 basis points before today. The size of the cut by the Bank of England raises the possibility of a bigger-than-50-bp cut by the ECB today, but a 50-bp rate cut at the same time by the Swiss National Bank suggests that the ECB will not come close to matching the size of the Bank of England's move. Larry Greenberg CurrencyThoughts

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Bank of England Slashes Key Lending Rate to Lowest Since 1955

By Jennifer Ryan

Nov. 6 (Bloomberg) -- The Bank of England unexpectedly cut the benchmark interest rate by 1.5 percentage points to the lowest since 1955 as U.K. policy makers tried to limit damage caused by the worst banking crisis in almost a century.

The nine-member Monetary Policy Committee, led by Governor Mervyn King, reduced the bank rate to 3 percent, the biggest single step in 16 years. The move was predicted by none of the 60 economists in a Bloomberg News survey.

``It's absolutely staggering and deeply impressive,'' said Brian Hilliard, director of economic research at Societe Generale in London. ``They are clearly grasping the nettle and taking deep action. Boy, this is going to have an impact.''

The seizure in credit markets has left Britain on the edge of its first recession since 1991, prompting a 50 billion-pound ($80 billion) bank rescue package from the government and a half-point emergency rate cut on Oct. 8.

Prime Minister Gordon Brown's administration stepped up pressure on commercial banks to pass on rate reductions to businesses and consumers struggling with higher food and fuel costs. Lloyds TSB Group Plc said its customers would feel the full impact of the central bank's reduction. Barclays Plc and HSBC Bank Plc said they had the matter under review.

``We really do expect them to pass cuts on now to customers,'' Yvette Cooper, a junior Treasury minister, said on Sky News. ``People around the country would expect that. They now need to see the benefits from the Bank of England today.''

Pound's Decline

The pound dropped immediately after the decision before rebounding. It traded at $1.6011 at 12:30 p.m. in London compared with $1.5868 before the decision.

Economists said policy makers may lower the key rate again in coming months, and opposition politicians said the size of today's move suggested the economy is in bigger trouble than most people think.

``The cut today from the Bank of England is an indication of the seriousness of the crisis we're facing,'' George Osborne, who speaks for the Conservative opposition on finance, told broadcasters. ``It is a confirmation we are in a very deep economic hole.''

Unions that fund Brown's ruling Labour Party said not enough is being done to ensure that banks step up lending. They praised the central bank's decision.

Union Pressure

``The real challenge is to ensure that these cuts are passed on to both business and mortgage customers,'' said Adam Lent, head of economics at the Trades Union Congress, which represents more than 7 million workers. ``Too many banks seem to be more interested in hanging on to their bonuses than using the huge bail out from the taxpayer for its proper purpose of getting the economy moving.''

Banks are attempting to rebuild balance sheets after losses and writedowns following the start of a worldwide credit squeeze last year. Earlier this week, HBSC Chief Operating Officer David Hodgkinson signaled not all rate reductions would be passed through to all customers.

``Building societies will do all they can to ensure that the cost of mortgage borrowing is as low as possible,'' said Adrian Coles, director-general of the Building Societies Association. ``However, the bank rate is just one of the issues that they have to consider.''

Global policy makers are escalating their response to the credit crunch after a coordinated round of rate cuts last month. The European Central Bank and Swiss central bank both trimmed their key rates by a half point today.

Global Declines

The Federal Reserve last month lowered its main rate to 1 percent, matching the lowest in a half century.

The Bank of England is working with the government to limit the fallout from what it calls the worst global banking crisis in almost a century. Brown last month brokered a takeover of HBOS Plc, the nation's biggest mortgage lender. Bank of England figures show financial institutions in the U.S. and Europe have suffered $2.8 trillion in securities losses from the crisis.

A global slowdown probably will drag down inflation, which accelerated to a record 5.2 percent in September. Falling commodity prices also may help. Wheat prices have plummeted, and a barrel of oil costs half of what it did in July.

``The risks to inflation have shifted decisively to the downside,'' the Monetary Policy Committee said in a statement after today's decision. Policy makers ``judged that a significant reduction in Bank Rate was necessary now in order to meet the 2 percent target'' for inflation.

`Painful' Recession

``They're admitting that this recession is going to be very painful and have a huge impact on inflation,'' said George Buckley, an economist at Deutsche Bank AG in London. ``This is obviously a lot of help but it remains to be seen how much gets passed through.''

Shares of Tomkins Plc fell the most in 16 years today after the U.K. maker of auto parts and building materials said markets have worsened ``considerably'' since the end of June. Bovis Homes Group Plc, the U.K.'s most profitable homebuilder, said today falling prices are hurting margins.

Manufacturing is in its longest contraction since 1980, while U.K. house prices fell an annual 14.9 percent in October, the most in at least 25 years, HBOS said today. Unemployment claims rose to the highest level in almost two years in September.

``There has been a very marked deterioration in the outlook for economic activity at home and abroad,'' the Bank of England said today. ``The availability of credit to households and businesses is likely to remain restricted for some time.''

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net

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Chevron's Pembroke FCC Still Down, Associated Units Started

By Gianluca Baratti

Nov. 6 (Bloomberg) -- Chevron Corp., the second-largest U.S. oil company, said the gasoline-making unit at its Pembroke refinery in Wales is still down.

Chevron started associated units this week, a spokesman who declined to be named said by telephone today. He wouldn't give a date for when the fluid catalytic cracker will be back up.

The units were shut in mid-September for regular maintenance, which happens every five years. Fluid catalytic crackers are involved in gasoline production. The site also has an alkylation plant, used to make components for the motor fuel.

The Pembroke refinery has the capacity to handle 210,000 barrels of oil a day and is Chevron's only oil-processing facility in the U.K. The catalytic cracker has a capacity of 90,000 barrels a day, according to data compiled by Bloomberg.

The whole facility was forced to shut at the end of April because of a fault in a steam plant. Processing units were restarted in early May. In August, the alkylation unit was halted for about two days because of a leak.

To contact the reporter on this story: Gianluca Baratti in Madrid gbaratti@bloomberg.net.

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Petroplus to Run Teesside Refinery at 30%, Cutting Ekofisk Use

By Alexander Kwiatkowski

Nov. 6 (Bloomberg) -- Petroplus Holdings AG plans to cut operating rates at its Teesside, U.K., oil refinery to about 30 percent of capacity this quarter, potentially hurting demand for North Sea Ekofisk crude.

Petroplus will operate the plant at about 30,000 to 40,000 barrels a day in the fourth quarter, the Zug, Switzerland based company said in a statement today. The refinery has the capacity to run 117,000 barrels of crude a day, according to the company's Web site.

The Teesside refinery runs the Ekofisk blend of crude, one of the four types used to determine the Dated Brent benchmark price.

To contact the reporter on this story: Alexander Kwiatkowski in London at akwiatkowsk2@bloomberg.net

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International Power Rises as U.K. Output Offsets Station Halts

By Paul Dobson

Nov. 6 (Bloomberg) -- International Power Plc, the U.K. utility that produces electricity in 20 countries, rose in London trading after saying earnings from British gas-fired and hydroelectric plants will offset shutdowns at other stations.

International Power rose as much as 11.75 pence, or 4.6 percent, to 268 pence and was 266 pence at 9:53 a.m. in London. The shares outperformed the Dow Jones Europe Stoxx Utilities Index, which declined 2.6 percent.

``International Power's diverse portfolio continues to serve it well,'' Tina Cook, an analyst at Charles Stanley in London, said today by e-mail. The company has ``capitalized on the currently tight conditions in the U.K. power market.''

The Deeside gas-fed plant and hydro plants in Wales captured higher U.K. power prices and ran harder after shutdowns at other generators made electricity production more profitable, the company said today in a statement. Month-ahead power in the U.K. traded at a record of more than 150 pounds ($238) a megawatt-hour last month, according to ICAP Plc.

``The fundamentals of our business remain strong,'' the London-based company said. The utility doesn't need to carry out any ``significant'' refinancing of debt until 2010, it added.

Unscheduled production halts have caused International Power to underperform its peers this year. In August, the company said work at its Rugeley station in England would dent full-year profit. It announced on Oct. 14 that a fire shut its ISAB plant in Italy for the rest of the year.

`Marginally Lower'

Profit margins for plants in North America will be ``marginally lower'' than the company's previous guidance, according to today's statement.

Chief Executive Officer Philip Cox is adding generation facilities from Portugal to Pakistan to profit from growing global demand. The company reported first-half earnings per share excluding one-time items of 14.2 pence, below the 14.8 pence median estimate of five analysts surveyed by Bloomberg News. Earnings were curbed by an unplanned production halt at its Hazelwood plant in Australia.

International Power started both power-generation units at its coal-fired Rugeley station by Oct. 9, after turbine upgrade work failed and forced the plant to be shut down. The company said today it will delay work to complete reductions in sulfur emissions from the plant to the first quarter next year, from a previous target for the end of this year.

End of Year

The company said one unit at the 562-megawatt ISAB plant will be offline for the whole of 2009, and the lost earnings will be covered by insurance. A second unit at the plant will start before the end of this year.

In Pakistan, some payments for the electricity International Power produces have been delayed. The company is receiving payments for current output and interest on overdue amounts. It's ``confident that the issue will be resolved satisfactorily.''

The company may become a bid target because the drop in its share price is unwarranted, Evolution Securities Ltd. analysts said on Oct. 16. Declines related to lower crude-oil prices and higher borrowing costs aren't justified, they said.

International Power has ``good liquidity, strong free cash flow generation, and committed corporate bank facilities of $850 million,'' it said today.

The ``solid'' financial position and confidence that the position in Pakistan will be resolved are ``reassuring,'' Cook said.

International Power forecast the tax rate this year will be about 22 percent.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net

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Canadian Natural Resources Profit Rises on Oil Price

By Joe Carroll

Nov. 6 (Bloomberg) -- Canadian Natural Resources Ltd., which is leading a C$9.7 billion ($8.3 billion) project to expand output from Alberta's oil sands, said third-quarter profit rose after crude prices climbed to a record.

Net income increased to C$2.84 billion, or C$5.25 a share, from C$700 million, or C$1.30, a year earlier, the Calgary-based company said today in a statement. Excluding the effects of hedging, stock-based compensation and currency fluctuations, per-share profit was C$1.78, or 27 cents higher than the average estimate of 10 analysts surveyed by Bloomberg.

President Steve Laut expects to begin pumping crude from the Horizon Oil Sands Project in northern Alberta by the end of December, even after today announcing the third cost increase this year. Revenue jumped 45 percent to C$3.97 billion.

Oil futures jumped to an average of $118.22 a barrel from $75.15 a year earlier, the biggest third-quarter increase since the contracts began trading in New York in 1983.

Canadian Natural's gas, excluding hedging, sold for an average of C$8.82 per thousand cubic feet, up 50 percent from a year earlier. Gas production fell 9.5 percent to 1.49 billion cubic feet a day. Only EnCana Corp. of Calgary pumps more gas from Canadian fields.

Lower Output

Oil output fell 7.8 percent to 306,970 barrels a day, Canadian Natural said. Before hedging, the company' oil sold for an average of C$102.30 a barrel, up 76 percent from the third quarter of 2007.

Average oil output will peak at 318,000 barrels a day this year, down from an August estimate of 350,000 barrels, Canadian Natural said. Crude accounts for 57 percent of the company's output, which comes from wells in North America, the U.K. and Africa.

Laut, 51, said plunging commodity prices prompted the company to temporarily shelve two planned expansions at the Horizon project, where the cost estimate today rose by C$441 million, or 4.8 percent.

Spending next year on wells, mines and processing plants will fall to C$4 billion, down 47 percent from the estimated 2008 budget, Canadian Natural said.

Crude futures traded in New York plunged 56 percent in the past 17 weeks from a record $147.27 a barrel as economic growth slowed in the world's biggest energy-consuming nations, curbing demand.

Canadian Natural fell 4 percent to C$58 at 8:04 a.m. in Toronto before the start of regular North American trading. The shares have dropped 17 percent this year, headed for their biggest annual decline since 1998.

(Canadian Natural will hold a conference call at 9 a.m. New York time, accessible on the company's Web site at http://www.cnrl.com)

To contact the reporters on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net

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IEA Sees Oil Rebounding to Average $100 Through 2015

By Grant Smith

Nov. 6 (Bloomberg) -- The International Energy Agency, an adviser to 28 nations, said it assumes oil import prices will rebound to average $100 a barrel between 2008 and 2015 and said the threat of a ``supply crunch'' remains.

The agency cut its global oil demand estimate for 2030 by 10 million barrels a day, to 106 million barrels, ``reflecting mainly the impact of much higher prices and slightly slower GDP growth,'' in an executive summary of its annual World Energy Outlook today. The full report will be published on Nov. 12.

``There remains a real risk that under-investment will cause an oil-supply crunch'' by 2015 as the decline in output from mature oilfields speeds up, the Paris-based adviser to 28 oil-consuming nations said. ``The current financial crisis is not expected to affect long-term investment, but could lead to delays in bringing current projects to completion.''

The agency raised its forecast for the world's energy investment needs from 2007 through to 2030 by more than $4 trillion to above $26 trillion. The world will require another 64 million barrels a day of oil capacity as declining production in existing fields accelerate to 8.6 percent from 6.7 percent currently, the IEA said.

Global energy demand, including oil, natural gas and coal, is set to grow 1.6 percent a year in that period, according to the summary.

Oil Prices

Oil prices, which have dropped by more than half from a record $147.27 a barrel in July, may exceed $200 a barrel in nominal terms in 2030, the agency said. Global oil demand growth will average 1 percent a year in the period, with all of the increase coming from developing economies.

OPEC's share of the world oil market, provided those nations invest in new supply, will rise to 51 percent in 2030, from 44 percent last year, the IEA said. Production ``has already peaked in most non-OPEC countries and will peak in most others before 2030,'' it said.

Saudi Arabia, the largest member of the Organization of Petroleum Exporting Countries, is projected to pump 15.6 million barrels a day in 2030, the agency said. The kingdom produced 9.35 million barrels a day last month, according to Bloomberg estimates.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net

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Asian Currencies: Won Drops Most in 3 Weeks; Rupiah, Peso Slide

By David Yong

Nov. 6 (Bloomberg) -- Asian currencies declined, with South Korea's won tumbling the most in three weeks, on speculation overseas investors will sell emerging-market assets as a global economic slump deepens. Indonesia's rupiah hit a seven-year low.

Seven of the region's 10 most-active currencies excluding the yen fell after data yesterday showed service industries in the U.S. and Europe shrank at record rates in October, fanning concern recessions loom in the world's biggest economies. Stock benchmarks dropped across Asia, led by South Korea's Kospi index.

``The stock market is the key point in the won's movements these days,'' said Ko Yun Jin, a currency dealer at Kookmin Bank in Seoul, the country's largest lender. ``Foreign investors were buying the dollar after they sold local shares.''

The won slid 4.9 percent to 1,330.80 per dollar as of the 3 p.m. local time close of trading, according to Seoul Money Brokerage Services Ltd. The currency is down 30 percent this year, Asia's worst performance.

Indonesia's rupiah fell 1.1 percent to 11,050 per dollar, poised for the lowest close in Jakarta since 2001. The Philippine peso declined 0.9 percent to 48.495 and the ringgit lost 0.5 percent to 3.5410.

The yen gained against the euro on speculation the European Central Bank will slash interest rates today and signal more cuts are needed to stave off an economic slump. Japan's currency rose to 126.68 per euro from 126.87 late yesterday in New York.

The Kospi plunged 7.6 percent as global funds sold more Korean equities than they bought this week, extending monthly outflows since June, according to stock exchange data. The MSCI Asia Pacific Index fell 5.9 percent, the most since Oct. 27, when it closed at a five-year low.

Bond Sales

Bank Indonesia refrained from cutting its benchmark interest rate today to help stem an exodus of foreign investors. Policy makers kept the benchmark rate at 9.5 percent after six increases since May.

Overseas ownership of Indonesian government bonds fell 16 percent as of Nov. 4 from an August record, while the Jakarta Composite index has more than halved this year, headed for its worst annual performance on record. A central bank report yesterday showed yesterday foreign-exchange reserves slumped to $50.58 billion in October from $57.11 billion in September.

``The capacity of the central bank to intervene now has been somewhat reduced'' by lower reserves, said Enrico Tanuwidjaja, an economist at Oversea-Chinese Banking Corp. in Singapore. ``The rupiah will be weaker on the comeback of risk aversion to emerging markets.''

`Tactical Shift'

The ringgit weakened on concern investors will add to a record 19.1 billion ringgit ($5.4 billion) withdrawal from the local bond market. The Kuala Lumpur Composite Index has dropped 38 percent this year, poised for its worst year since the Asian financial crisis in 1997.

Global investors yesterday demanded 6.01 percentage points more than U.S. Treasury yields to own emerging-marker debt, according to JPMorgan Chase & Co's EMBI+ Index. The risk premium jumped 37 basis points, ending a seven-day drop. A basis point is 0.01 percentage point.

``Markets are pricing in a recession next year,'' said Ang Kok Heng, who manages $156 million as chief investment officer at Phillip Capital Management in Kuala Lumpur. ``There's a tactical shift out of non-U.S. dollar assets.''

India's rupee snapped a six-day rally, losing 0.3 percent to 47.590 per dollar. The Sensex Index of the nation's stocks dropped as much as 4.8 percent.

``The movement in the equity and currency market suggests concerns over global growth are far from over,'' said Vikas Babu, a currency trader at state-owned Andhra Bank in Mumbai.

Elsewhere, Taiwan's dollar traded at NT$32.819 versus NT$32.830 late yesterday in Asia, while the Thai baht slid 0.2 percent to 35.01. The Singapore dollar weakened 0.2 percent to S$1.4832 and China's yuan was little changed at 6.8250.

To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net

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South African Rand Falls Against Dollar as Stock Markets Tumble

By Garth Theunissen

Nov. 6 (Bloomberg) -- South Africa's rand fell against the dollar for a second day as the nation's equities slipped with those around the world on concern the global economy is headed toward a recession.

The currency also declined the most in three days after a report by Absa Group Ltd., South Africa's biggest mortgage lender, showed house prices rose at the slowest pace in more than 15 years in October as higher interest rates and record inflation curbed consumer spending. The country's benchmark stock index fell for a second day.

``The reality is the world is heading for a major slowdown which isn't good for emerging-market prospects,'' said Roderick Ngotho, a currency strategist for Europe, the Middle East and Africa at UBS AG in London. ``South Africa's economy also suffers from the structural imbalances of slowing growth, high inflation and a large current-account deficit. On a relative-value basis investors would rather put their money elsewhere.''

The rand weakened as much as 2.7 percent to 10.0394 per dollar and was at 9.9700 by 1:30 p.m. in Johannesburg. It fell versus 15 of the 16 most-actively traded currencies monitored by Bloomberg, slipping 1.2 percent versus the euro to 12.8468.

The rand will ``remain weaker and will trade around the 10 handle within a three-month window which is weak by historical standards,'' Ngotho said.

South Africa's FTSE/JSE Africa All Share Index declined 3 percent while the MSCI World Index fell 2.5 percent. Futures on the Standard & Poor's 500 Index slipped 2 percent.

ECB Rates

The European Central Bank will cut interest rates for the second time in less than a month today as the region's economy suffers its worst slump in 15 years, according to 54 of 55 economists in a Bloomberg News survey. The ECB announces its decision at 1:45 p.m. in Frankfurt.

Economic growth in the euro area will slump to just 0.1 percent next year, the worst performance since 1993, the Brussels-based European Commission forecast on Nov. 3.

The rand lost 30 percent this year as foreigners sold almost 69 billion rand ($7.1 billion) more than they bought of the country's assets, partly on concern it will struggle to finance its current-account gap amid the world's worst financial-market crisis since the 1930s.

Africa's biggest economy relies on the inflows to fund the deficit which will reach 7.6 percent of gross domestic product this year, Finance Minister Trevor Manuel said on Oct. 21. Economic growth will slow to 3.7 percent this year from 5.1 percent last year, he predicted.

``South Africa's number one difficulty will be funding the current-account deficit, particularly in an environment of slowing growth and stubborn inflation,'' Ngotho said.

Inflation slowed for the first time in more than a year in September, easing to 13 percent from a record 13.6 percent in August, the statistics office said on Oct. 29. Still, consumer- price growth has exceeded the central bank's 6 percent ceiling for 18 consecutive months.

Government bonds fell for the first time in three days, with the yield on the benchmark 13.5 percent security due September 2015 adding 9 basis points to 8.76 percent. The yield on the 13 percent note maturing in August 2010, which is more sensitive to interest-rate expectations, gained 4 basis points to 9.28 percent. Yields move inversely to bond prices.

To contact the reporter on this story: Garth Theunissen in Johannesburg gtheunissen@bloomberg.net

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Pound Advances Against Euro; BOE Cuts Rate to Lowest Since 1955

By Agnes Lovasz

Nov. 6 (Bloomberg) -- The pound rose against the euro after the Bank of England cut its key interest rate by a greater-than- forecast 150 basis points, fueling optimism the faltering economy will recover faster than anticipated.

U.K. government bonds advanced as the nine-member Monetary Policy Committee, led by Governor Mervyn King, lowered the benchmark rate to 3 percent, the lowest level since 1955. None of the 60 economists surveyed by Bloomberg forecast a reduction of that size. Britain's economy contracted 0.5 percent in October after shrinking by the same amount in the third quarter, the National Institute of Economic & Social Research said today.

``The market is now looking to reward proactive central banks,'' said Geoff Kendrick, a senior strategist in London at UBS AG, the world's second-biggest foreign-exchange trader. ``Clearly, the global economy, especially the U.K., is in a recession. Rate cuts now mean that growth will be better down the track.''

The pound advanced to 80.46 pence per euro as of 1:14 p.m. in London, from 81.46 yesterday. It was at $1.5857, from $1.5910. The pound will strengthen to 79 pence per euro in a month's time, Kendrick predicted.

The U.K. economy is sputtering as the fallout from the global credit crisis batters lending to companies and consumers. House prices fell 13.7 percent in the three months through October from a year earlier, the most in at least 25 years, HBOS Plc, the nation's largest home-loan provider, said today.

`Aggression Rewarded'

``Markets are looking more concerned about the extent to which economies are in a recession and are looking to central banks to rescue the economic system,'' said Kamal Sharma, a currency strategist in London at JPMorgan Chase & Co., which forecast a 1 percentage-point cut today. Larger cuts ``could be positive for sterling. Aggressive central banks may actually be rewarded.''

Britain's currency extended its advance against the euro after the European Central Bank lowered its main refinancing rate 50 basis points to 3.25 percent today, as predicted by all but one of 55 economists in a Bloomberg News.

``The market is disappointed with only a 50 basis-point cut from the ECB after the Bank of England's bigger-than-expected cut,'' said Daragh Maher, deputy head of global currency strategy in London at Calyon, the investment-banking arm of Credit Agricole SA. ``The ECB looks like it's behind the curve and the euro is being marked down on the back of that.''

`Serious Disruption'

The Bank of England's reduction was the biggest one-step cut since Sept. 18, 1992, the aftermath of Britain's ejection from the European currency-peg system that was the precursor to the euro.

Global policy makers are escalating their response to the worldwide credit crunch after a coordinated round of global cuts last month. The Swiss central bank unexpectedly trimmed its main lending rate by 50 basis points today. The Federal Reserve last month lowered its target interest rate for overnight loans to 1 percent, matching the lowest in a half century.

``Since mid-September, the global banking system has experienced its most serious disruption in almost a century,'' the Bank of England said in a statement accompanying today's decision.

U.K. government bonds rose, with the yield on the two-year gilt, which is more sensitive to interest-rate changes, falling 21 basis points to 2.53 percent. The 4.75 percent security due June 2010 advanced 0.32, or 3.2 pounds per 1,000-pound face amount, to 103.42. The 10-year yield declined 8 basis points to 4.34 percent. Bond yields move inversely to prices.

Governor King may need to lower the benchmark rate to zero, according to economists including former policy maker Charles Goodhart and Citigroup Inc.'s Michael Saunders.

``I don't think anybody believes this cut will be the end of it,'' Saunders said in an interview yesterday. ``The U.K. had one of the biggest credit and housing booms and the biggest drop in savings, so that makes us more exposed to the unwinding of it all.''

To contact the reporters on this story: Agnes Lovasz in London at alovasz@bloomberg.net

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Canada's Dollar Gains After Building Permits Unexpectedly Rise

By Chris Fournier

Nov. 6 (Bloomberg) -- Canada's currency rose after a report showed building permits unexpectedly increased.

``Better-than-expected domestic building permits amidst an overall rebound for major currencies against the U.S. dollar'' is boosting the Canadian dollar, said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. A ``probe through technical support at C$1.1660'' is also helping the Canadian currency.

The Canadian dollar strengthened 0.6 percent to C$1.1630 versus the U.S. dollar at 8:54 a.m. in Toronto, from C$1.1696 yesterday. One Canadian dollar buys 85.97 U.S. cents.

The total value of permits issued by municipalities gained 13.4 percent in September. A decline of 1 percent was forecast, according to the median estimate of 13 economists surveyed by Bloomberg.

To contact the reporter on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net

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