Actual finance blog

For car buyers, four words mean the difference between going home in a new sedan or their old clunker: Your loan is approved.

They are being uttered more often these days, spurred by a government program that provides guarantees when those loans are sold to investors. That is helping banks, credit unions and auto finance companies make auto loans at a quickening pace. And consumers are paying less to borrow. Interest rates have been at record lows since December 2008.

It’s bit of good news for the auto industry in the U.S., where 2009 sales are expected to hit a 30-year low of around 10 million when figures are announced today. Partly because of loosening credit, analysts expect more than 1 million cars and light trucks to be sold in December, the best monthly performance since Cash for Clunkers in August.

Financial firms wrote 5.5 percent more car loans in the third quarter compared with the prior three months, Experian Automotive says. Fourth-quarter figures aren’t yet available, but Jesse Toprak, vice president of auto pricing tracker TrueCar Inc., says December saw an uptick in auto loan approvals for consumers with average or above-average credit as auto finance companies tried to clear out inventory.

Paul Taylor, chief economist for the National Auto Dealers Association, said used-car prices also have stabilized due to limited supply, making used-car loans more attractive to banks.

Still, Toprak said it could take another year or even longer for financial firms to trust consumers enough to return to normal levels for auto lending cheap business cards. It’s also far from the freewheeling days of the credit boom. Third-quarter auto lending was down 30 percent from the same period in 2006, a year when U.S. car and light truck sales reached 16.5 million.

In the meantime, only those with good credit need apply.

A top-tier borrower — someone with a credit score between 720 and 850 — can get a 36-month auto loan with an average monthly rate of 5.74 percent, down from 6.65 percent a year ago, according to Informa Research Services, a financial research firm in Calabasas, Calif. On a $20,000 car loan, that’s a savings of nearly $300 over three years.

But the cost of borrowing has risen for people in the bottom tier. A person with a score of 500 to 589 has seen the average rate climb to 18.56 percent from 16.47 percent a year ago. That translates to an extra $751.68 over three years. Banks are still nervous about lending money to risky borrowers given high rates of unemployment, foreclosures and late payments since the financial crisis began.

"We used to have a subprime auto lending industry," says Dan Alpert, managing partner at Westwood Capital, an investment bank involved in the securitization business.

"We don’t have that anymore."

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Brazil’s average interest rate for consumers and companies fell to the lowest since December 2007 last month as banks stepped up lending amid declining defaults.

The average interest rate on bank loans dropped to 34.9 percent from 35.6 percent in October, the central bank said today in a report issued in Brasilia. It’s the lowest since an average 33.8 percent in December 2007. Rates on consumer loans touched the lowest on record, Altamir Lopes, the head of the central bank’s economic department, told reporters in Brasilia.

“The perception of lower risk is the main reason for that result, but the reduction of reserve requirements and increasing competition among banks are also influencing it,” said Roberto Padovani, senior strategist at WestLB do Brasil in Sao Paulo. “Average interest rates should continue to fall for the next six months before stabilizing.”

Brazil emerged from its first recession since 2003 in the second quarter after central bank policy makers made five straight cuts in the benchmark interest rate to a record low of 8.75 percent. President Luiz Inacio Lula da Silva has publicly pressed state and private banks to expand credit to consumers and companies to sustain demand, keep investment in public works and help meet the government’s target of building 1 million homes.

Personal Defaults

The personal default rate in Brazil fell to 8.1 percent in November, from 8.2 percent in the previous month, the bank said, the lowest level since last year.

Total outstanding loans expanded 1.5 percent in November to 1.39 trillion reais ($800 billion) from a revised 1.37 trillion reais the previous month, the central bank said. That figure expanded 1.5 percent in the December 1-15 period, Lopes said.

Total outstanding credit will reach 48 percent of gross domestic product by the end of next year, after touching 45.3 percent this month, the central bank’s director of economic policy, Mario Mesquita, said Dec. 22.

After pumping 100 billion reais into the state development bank, the Brazilian government pledged another injection of 80 billion reais into the bank, known as BNDES, to ease credit conditions for infrastructure projects and other investment.

The economy will expand as much as 5.8 percent next year, fueling inflation above the government’s target of 4.5 percent, the central bank said in a report earlier this month.

Brazil’s non-state banks will be able to issue domestic debt as a way to raise funds, Finance Minister Guido Mantega said Dec. 9. The new paper, which needs to be approved by the central bank’s monetary council, will reduce costs and allow private lenders to compete for long term loans, Mantega said.

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The Federal Reserve is telling Centrue Financial Corp. to fix its lending practices, write off bad loans and keep enough capital. The company, parent of Centrue Bank, was also forbidden from paying dividends to stockholders or interest on some subordinated debt without Fed permission.

The enforcement action, in the form of a written agreement with the bank, was announced Friday.

Centrue Bank lost $22 million in the first nine months of this year, and 8 percent of its loans were seriously behind in payments. That’s more than double the percent of problem loans at similar banks.

Centrue, with $1.3 billion in assets, is based in Clayton. It has four branches in the metro area, but most of its operations are in northern and central Illinois.

The agreement requires the bank to quickly write off loans that bank examiners had declared a loss unless the bank manages to collect on them sam day payday loan. The bank is banned from extending new loans to borrowers whose old loans were charged off as uncollectable. It must also give the Fed a plan for collecting on overdue loans or doubtful loans of more than $2.5 million.

Centrue was also told to improve its lending practices, and come up with compensation policies that don’t encourage excessive risk-taking.

In a news release, the bank said it has "aggressively taken steps" to address the examiners’ findings.

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Angry employees at an idle air conditioning manufacturer in Mississauga occupied the company’s plant for more than three hours Monday after they charged management "blindsided" them with an abrupt shutdown and no paycheques for extra work.

More than 100 workers mingled peacefully and retrieved belongings including tools at the M&I Air Systems plant in a pressure tactic to get some answers about their missing pay and the plant’s future.

Bob Chernecki, a senior official for the Canadian Auto Workers, said management had not responded to union queries since last week, when the company halted operations and told employees to go home.

Chernecki said in an interview that the occupation led to a meeting where management indicated it would inform the union about its financial status, payment to workers and any possible chance of a reopening on Wednesday.

"These workers were blindsided by this corporation just before Christmas," he said.

"It’s ridiculous. They received no warning and now face so much uncertainty."

M&I did not return calls for comment about the company’s situation.

Chernecki said he expects the U.S.-based company to slip into receivership or fall under bankruptcy court protection during the next few days.

"It doesn’t look good," he said.

M&I formed in 1981 and provides air-moving technology and systems for industrial and institutional buildings.

Chernecki said M&I did not provide regular biweekly paycheques on Dec.10, but managers promised they would submit them on the following Monday if employees worked during the same weekend to complete a major air-system project for a customer.

"They didn’t get paid on the Monday and on the Tuesday the company called them in at 9 a.m. and told them there was no work and to go home," he added.

The union, which represents about 155 workers at the plant, is seeking wages including overtime for the employees during the past three weeks plus severance and holiday pay.

Furthermore, it wants the company to file employment insurance information with the federal government immediately.

The workers, including some staff with more than 20 years service, negotiated a new three-year contract during the fall that contained small wage increases for lower-paid staff and a $400 lump sum amount for higher-paid employees. The average wage is about $18 an hour.

The CAW and other unions have pushed for stronger legislation to protect workers who are victims of plant closures, including giving them higher standing than other creditors.

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Canada’s finance ministers have agreed to consult the public on how to boost retirement savings in advance of aging baby boomers straining public health and long-term care services.

Meeting in Whitehorse Friday, they agreed with Ontario’s Dwight Duncan that government officials should study, consult and report back by May on a short list of proposals put forward by industry, labour and advocacy groups.

The list includes everything from a continued reliance on voluntary savings plans to forcing higher contributions to the Canada and Quebec Pension Plans in order to eventually pay for richer benefits.

Duncan said in a telephone interview there was an exciting degree of consensus among ministers of all political stripe about the challenges and options that need to be explored "in a prudent and timely fashion."

"There is a certain impatience," Duncan said, alluding to earlier declarations by British Columbia and Alberta finance ministers that they were prepared to start province-wide savings plans to expand pension coverage.

But, Duncan said after the ministers met, "I think there is a very real willingness to work together" and agreement should be a "pan-Canadian solution."

Research papers commissioned by Ottawa, Ontario and British Columbia documented the success Canada has had with tax-supported programs that have reduced poverty among the elderly.

But Ontario’s study also raised questions about why many middle-income and upper-income Canadians are nearing retirement without enough savings or assets to avoid a decline in their standard of living.

Meanwhile, said Duncan, high debt levels threaten to delay the increase in savings that support living standards in old age and allow the nearly 10 million baby boomers to help fund through their taxes the cost of health care and long-term care as they age.

Ted Menzies, parliamentary secretary to federal finance minister Jim Flaherty, said in a telephone interview "we really didn’t rule out any options."

But he said Flaherty urged ministers from the provinces and territories to adopt the first principle of medicine when considering changes to Canada’s retirement income system: "Do no harm high risk personal loans."

The provinces said unanimously that no province gets out ahead of the rest," Menzies told the Canadian Press. “They all agreed that a pan-Canadian solution would ultimately be the best solution."

Ontario’s outline of the options that should be considered acknowledges that "changes to any one pillar or the retirement income system will directly or indirectly affect other pillars (of the private and public retirement income system)."

For example, an expansion of Canada Pension Plan coverage could result in changes to private company pension plans, whose benefits are generally integrated to supplement CPP benefits.

Other options include a supplementary pension plan, either voluntary or with automatic enrolment and the right to opt out, regulatory changes to allow expansion of private-sector savings options and tax reform to increase the incentive and opportunities to save more.

Experts, labour groups and some provinces have been sounding the alarm on the fraying of Canada’s pension system. They say the recent financial crisis exposed weaknesses in the system and the aging of the population will only exacerbate the pitfalls.

More and more people are left uncovered by corporate pension plans, they say. Those who are covered have plans that are less and less generous. And those with no plan often fail to save on their own.

Reports prepared for the Whitehorse meeting by University of Calgary economist Jack Mintz and pension expert Bob Baldwin for the Ontario government concluded that Canada’s retirement system has been working well.

But Baldwin emphasized the future is dim. He said keeping the status quo would seriously hurt the standard of living of some significant groups of people: immigrants and single people depending on the federal government’s Guaranteed Income Supplement, and seniors with dependants.

The Canadian Life and Health Insurance Association said it was pleased the ministers want to study proposals for bringing more workers into pension plans offered by insurers.

jdaw@thestar.ca

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Stocks gained Monday, with the three leading indexes closing at 14-month highs, after Citigroup said it will pay back government bailout funds and Dubai received $10 billion to cover its debt, easing worries the emirate might default on billions it owes.

The weak dollar also helped, lifting commodity shares and the stocks of companies that do a lot of business overseas.

The Dow Jones industrial average (INDU) rose 30 points, or 0.3%, closing at the highest point since Oct. 1, 2008.

The S&P 500 index (SPX) gained 8 points, or 0.7%, closing at the highest point since Oct. 2, 2008. The Nasdaq composite (COMP) rose 22 points, or 1%, closing at the highest point since Sept. 19, 2008.

After propelling the market off of 12-year lows hit in March, the S&P 500 has risen 64% as of Friday’s close.

"The market has shown some extraordinary strength here, but I think we’re moving into a period of greater volatility," said Don DeWaay, CEO at DeWaay Capital Management.

"This market is running a lot more on emotion now, rather than fundamentals," he said.

The Dow closed at a 14-month high Friday after better-than-expected reports on retail sales and consumer sentiment, but broader gains were limited by tech weakness and a strong dollar.

Citigroup: Citigroup said Monday that it will return $20 billion in bailout money to the government through a combination of stock and debt offerings.

Citigroup (C, Fortune 500) said the bulk of the payment will be funded through a $17 billion common stock offering. The company also said Treasury will sell up to $5 billion of the $25 billion in Citigroup common stock it holds shortly, and sell the rest of it over the next year.

Obama: President Obama met Monday with top executives of some of the nation’s biggest banks, including JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Wells Fargo (WFC, Fortune 500).

He said his main message to bankers was that banks received extraordinary assistance during the crisis, and now that the industry is back on its feet, it needs to reciprocate. He is expected to urge bankers to provide greater lending, cut back on bonuses and support financial reform efforts.

Exxon-XTO deal: Dow component Exxon Mobil (XOM, Fortune 500) said it will buy XTO Energy (XTO, Fortune 500) in a $41 billion stock and debt deal that values XTO shares at a 25% premium to its Friday closing price cash till payday. The deal also includes the assumption of $10 billion in debt.

Exxon shares fell 4% and limited any gains on the Dow. XTO shares rallied 17%.

Dubai: Worries that Dubai might default on billions of dollars in debt rattled world markets at the end of last month. But some of those fears have eased over the last few weeks on signs that any fallout will be limited.

Fears were further soothed Monday after the city-state received $10 billion in financing from Abu Dhabi, another of the United Arab Emirates.

World markets: Overseas markets gained. In Europe, London’s FTSE 100 rose 1%, the German DAX rose 0.8% and France’s CAC 40 rose 0.7%. Asian markets rose, with the exception of Japan’s Nikkei, which was little changed.

Dollar: The dollar slipped versus the euro and the yen, turning lower after the recent rally.

A weak dollar has added to the more than nine-month-old stock rally over the past nine months, giving a boost to dollar-traded commodities, as well as commodity shares and the stocks of companies that do business overseas. But so far in December, the dollar has been mixed or stronger, putting some pressure on stocks.

Commodities: The weak dollar gave a lift to dollar-traded commodities. COMEX gold for February delivery rose $3.90 to settle at $1,123.80 an ounce. Gold closed at an all-time high of $1,218.30 an ounce earlier this month.

U.S. light crude oil for January delivery fell 36 cents to settle at $69.51 a barrel on the New York Mercantile Exchange.

Bonds: Treasury prices were little changed, with the yield on the 10-year note standing at 3.55%, unchanged from late Friday. Treasury prices and yields move in opposite directions.

Market breadth was positive. On the New York Stock Exchange, winners topped losers roughly three to one on volume of 1.08 billion shares. On the Nasdaq, advancers beat decliners two to one on volume of 1.86 billion shares. 

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On the back of a recent issue of Bon Appétit magazine, a group of attractive, smiling young people is gathered around a white-cloth covered table, sipping wine and laughing.

The tag line is "Guess who’s paying for dinner? Your points."

It’s an ad for a credit card and the implication is clear: Use your card often enough and you’ll get something in return.

Canadians are crazy for rewards programs. Collectively, there are 114 million active members of rewards programs in Canada, according to Colloquy, the market research arm of LoyaltyOne, the group that owns the Air Miles program.

That’s more than four rewards programs for every man, woman and child in the country.

"When you can take a whole family on a trip and not pay anything, I think that’s fantastic. That’s worth thousands of dollars. Why wouldn’t you do it?" says Lynda Fishman, a 52-year-old children’s camp director in North York.

Fishman has at least three credit cards with rewards programs on them, and an Air Miles card she can use on its own to collect points. None comes with annual fees and they’ve produced enough points to send her family of five to Florida for a week.

She also earns a $150 bottle of Chanel perfume every few months with her Shoppers Drug Mart loyalty card. "I shop there whenever they have the 20 times bonus points on everything in the store."

In the minds of most consumers, these rewards are "free." But, of course, they’re not.

They come out of the pockets of retailers like Jim Stonley and Zafar Khokhar, co-owners of the Esso station at Front St. E. and Sherbourne St. in Toronto.

The pair say they pay nearly $11,000 a month on average in credit card fees and see little benefit, even from Esso-brand loyalty cards.

Indeed, they say they pay twice when a customer swipes their Esso points card – once to process the transaction and again when the customer redeems them because the points do not cover the full cost of the product or service.

Stonley and Khokhar say they feel they have to accept any credit card the consumer presents or risk losing their business to competitors. But the costs are starting to add up.

Profit margins on gas average 5 cents a litre. Credit card processing fees are on average 2 per cent. So, when the price of gas goes up, the credit card processing fee also increases and eats into the margins.

"It’s quite a lot of money for a small business person," Stonley said.

Many loyalty programs are part of a retailer’s marketing program. Retailers pay to join Air Miles because it helps drive cardholders to their stores. Shoppers Drug Mart uses its Optimum card to attract customers and push selected merchandise by doubling or tripling the points on those items.

These kinds of loyalty programs make up about 80 per cent of the rewards program market in Canada.

Consumers don’t seem to mind that the costs may be hidden in the prices of things they buy. Indeed, the Consumers Association of Canada opposes anything that would reduce the value of rewards programs, such as caps on credit card interest rates and fees.

Nearly half of Canadians use a credit card simply because it offers rewards, citing first points, then flights and finally cash as their preferred rewards, according to Chicago-based research firm Mintel International Inc.

Retailers say there is a fundamental problem in the way credit card programs are funded. They foot the entire bill but they do not derive all the benefits and say they have no ability to negotiate the rates.

That’s because merchant "swipe" fees are based largely on something called the "interchange rate."

"I can tell you, without a doubt, that all of the credit cards that come with rewards programs are fully paid for by the merchants," says Diane Brisebois, president of the Retail Council of Canada. The council estimates such fees now cost merchants $4.5 billion a year, or roughly 2 per cent of the value of every purchase Faxless payday loans. That amounts to nearly $400 per household, assuming these costs are passed on to consumers in the form of higher prices.

The Bank of Canada concluded credit cards have become the most expensive form of payment for merchants. The average debit card transaction costs 12 cents, but a credit card transaction costs 2 to 4 per cent of the value of the sale, according to the central bank.

Credit card companies say interchange keeps the system running smoothly. In a two-way network, where both sides have to agree to participate, it ensures banks have an incentive to issue cards to consumers, and merchants have an incentive to accept them, they say.

The fee is collected by the merchant’s bank and paid to the cardholder’s bank to compensate the card issuer for the cost of bringing cardholders into the system, the credit card companies say.

"Interchange is determined by MasterCard and makes up part of the fee paid by the merchant," Kevin Stanton, president of MasterCard Canada, told a Senate committee hearing earlier this year.

Merchants and small business owners say the system encourages a weird form of reverse competition in which credit card companies compete for the banks’ business by raising the interchange rate at the merchants’ expense.

This wasn’t a problem as long as merchants felt the rates were reasonable and negotiable, Brisebois says. That’s no longer the case.

Ever since most of Canada’s banks outsourced their merchant-acquiring business to third parties, it’s been a lot tougher for merchants to strike deals on credit card processing fees.

"The merchant used to deal directly with the branch manager of their bank. The merchant could negotiate with the manager, who wanted to keep the merchant’s banking business," Brisebois explains.

The situation took a turn for the worse after the credit card companies fiddled with their interchange rate structure and introduced a new class of "premium" cards. After years of relatively steady, predictable fees, both Visa and MasterCard expanded the number and kind of rates retailers pay from two or three rates to between 19 and 21.

The new premium cards, such as Visa’s Infinite card, come with more perks for consumers but cost merchants more to accept.

Retailers say these cards now represent 25 per cent of the value of all transactions and have a huge and unpredictable impact on the fees they face at the end of the month.

The bankers’ association says premium cards represent just 9 per cent of their credit card accounts and benefit the merchant by bringing in higher net worth customers.

Industry experts, such as Andrew Davidson of Mintel International Inc., say premium cards were created to offset banks’ rising loan losses during the economic downturn.

Add in other interchange changes and these new premium cards helped boost processing fees more than 10 per cent for Visa and nearly 20 per cent for MasterCard in the 12-month period ending last February, retailers say.

The credit card companies dispute the retailers’ figures, saying they have raised rates for some types of transactions and lowered them for others so the overall impact is neutral. The retail council says the new rates are designed to boost credit card use in grocery stores, gas stations and coffee shops where consumers prefer to use cash or debit.

Initially, credit cards were cheaper than cash or cheques and had the added benefit of reducing the risk of theft, says Andrew Ching, a marketing professor at the University of Toronto’s Rotman School of Management. Now, with the market saturated, banks began to use their reward programs to compete for market share, and to penetrate under-represented markets, such as grocery and gas.

Fishman, the points-collecting camp director, shrugs off retailer complaints. She accepts credit card payments from clients. "It’s just another cost of doing business."

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Carolina Diaz-Silva says she believes that learning a foreign language at an early age can give children a cognitive advantage in the future. Diaz-Silva is founder and director of International Schoolhouse, a Spanish-immersion preschool in Olivette. She started the school in August with 10 children and will be adding eight more in January.

Diaz-Silva, who speaks in English, Spanish, Italian and German, hails from Peru and moved to St. Louis 16 years ago. She spent her time teaching Spanish at MICDS in Ladue and also at Washington University.

In 2006, she received a master’s degree in Spanish Literature from Washington University and received an MBA from the university in May. She serves as an adjunct lecturer in the romance languages department of Washington University, teaching Spanish.

Diaz-Silva says she is trying to weather the economic challenges that come with her new venture and the competition from other preschools in the area.

Are the children enrolled in the program from different backgrounds?

We have a lot of diversity in our student body as well as our teachers. Out of 18 students, we have four Hispanic children, one Indian and one African-American.

What kind of economic challenges are you facing with the school?

I would say that I had a lot of interest in the school, because it is not a day care, it is only a preschool that has part-time hours.

But in today’s economy, preschool has become an option for a mother who stays home with her child. A lot of families are choosing not to make that expense. And that has an impact on the enrollment.

But I am happy that we are small and are able to gradually grow.

Has the performance of the school, so far, met your expectations?

I was naive no fax payday loan. I thought the school would fill up from the first day, because it is such a great idea.

It is also important to realize that I have to build trust with the parents. And that is exactly what we are doing right now.

We had an open house for children coming in January and we had the current parents be at the open house and talk to the prospective families. That made all the difference in the world. Because it wasn’t the director or the teacher selling what a great program we have, but the parents telling them how delighted they were with the program and how fantastic the teachers are.

Who are your competitors?

Preschool is very local. We did a lot of market research before starting the school and found out that families drive less than three miles for a preschool and a lot of families just walk.

There aren’t any Spanish-immersion preschools in our area, but there are a couple in St. Charles and Ballwin. My direct competition are other preschools in the area.

How do you publicize the school?

Most of our publicity comes from word-of-mouth. But we also do some advertising, like in St. Louis Kids Magazine, Ladue News, direct mailing, postcards.

We need to do more effective marketing. But I don’t believe marketing is going to get me more students. It is going to be my current families talking to their friends. Basically, I have 10 advocates, and I will have 18 in January.

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Indonesia can’t replicate the “high single digit” economic growth of China and India because of impediments to investment and high credit costs, according to Credit Suisse Group AG.

“We don’t expect investment to take off,” Cem Karacadag, an economist at Credit Suisse in Singapore, said in a report received yesterday. “It will take the government many years to fix the structural obstacles to investment, including corruption, regulatory risks, and a weak legal framework.”

President Susilo Bambang Yudhoyono’s re-elected government has “neither the mandate nor the capacity” to implement quickly the reforms needed to overcome these obstacles to investment, according to Credit Suisse. Borrowing costs are also too high as the central bank isn’t committed to keeping monetary policy “stable and tight,” Karacadag said in the report.

Indonesia wants to be included among the so-called BRIC nations of Brazil, Russia, India and China, according to Emil Salim, an adviser to President Yudhoyono and a former Cabinet member. The nation’s accelerating growth provides a case for its inclusion among BRIC economies, Morgan Stanley said in June.

Credit Suisse said it was likely that gross domestic product growth in Southeast Asia’s largest economy would remain below that of China and India.

“The key question for Indonesia is will investment accelerate quickly and be efficient enough to lift GDP growth to high single digits?” Karacadag said. “Our answer is no.”

‘Bright’ Outlook

Still, Indonesia’s long-term economic outlook is “bright” and annual GDP growth may average 5.6 percent from 2010 to 2014 and 6.5 percent from 2015 to 2019, according to Credit Suisse. That will see per capita income almost triple to $6,800 by 2019 from $2,300 in 2009, it said.

Indonesia’s economic growth accelerated in the three months to Sept. 30 for the first time in five quarters, with GDP expanding 4.2 percent from a year earlier. The $514 billion economy may expand 4.3 percent this year and between 5 percent and 5.5 percent in 2010, the central bank said yesterday.

“The country has a sound fiscal policy, good balance of payments, declining government and external debt ratios, and an improving political situation,” Karacadag said. “However, we don’t expect investment and real GDP growth in Indonesia to take off in a hurry.”

China and India will continue to achieve faster rates of GDP growth until Indonesia fixes structural impediments to investment and shows a “credible commitment to low inflation,” according to Credit Suisse.

Inflation Target

Bank Indonesia kept its benchmark interest rate unchanged at 6 payday loan.5 percent for a fourth straight month yesterday, after nine consecutive cuts that ended in August.

The central bank said monetary policy would be directed toward “keeping inflation low while taking into account the recovery of the economy.” Inflation this year may be “lower than” the target of 3.5 percent to 5.5 percent, the bank said.

“Unfortunately, we don’t perceive the government and Bank Indonesia to be committed to keep monetary policy stable and tight enough to rein in inflation and persistently high inflation expectations,” Karacadag said. “Even if the central bank was committed to bringing inflation under control once and for all, it first would probably have to keep real interest rates high for many years.”

Indonesia’s inflation rate has hovered around 4 percent to 17 percent over the past decade, according to Credit Suisse.

Weak Credibility

“Being able to deliver on their inflation targets in the coming two years would be a significant breakthrough for Indonesia,” said Enoch Fung, an economist at Goldman Sachs Group Inc. in Hong Kong. “Weak inflation credibility is the biggest issue overhanging the Indonesian risk premium.”

Indonesia’s inflation unexpectedly slowed in November, suggesting that the central bank may take more time before it follows other Asia Pacific nations including Australia, India and Vietnam in withdrawing monetary stimulus.

Consumer prices rose 2.41 percent last month from a year earlier after gaining 2.57 percent in October.

“There is less pressure for Bank Indonesia to increase rates earlier in 2010 following Vietnam and Australia,” said Destry Damayanti, chief economist at PT Mandiri Sekuritas in Jakarta. “The central bank may maintain the benchmark rate at the current rate of 6.5 percent at least until the second quarter of 2010 before gradually increasing it to 7.25 percent.”

Bank Indonesia needs to show a stronger commitment in its fight against inflation in order to bring down borrowing costs to companies and consumers, according to Credit Suisse.

“The higher the rate of inflation, the higher are real lending rates because of the inflation risk premium that is built into nominal interest rates,” Karacadag said. “It would only be much later, once tight and consistent policy has raised the credibility of the central bank, that the payoff would come in the form of lower real interest rates.”

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Business managers interviewed by Federal Reserve researchers conducting their eight-times-a-year review of the New England economy “cite mixed results amid signs of improvement, although activity generally remains below year-earlier levels,” the analysts wrote in the report, which was released Wednesday.

“Some respondents are beginning to hire and/or reverse pay cuts or freezes, or planning to in 2010,” the researchers wrote in the summary often referred to as the “beige book.”

“Prices are generally said to be stable,” they wrote. “Contacts in a number of sectors express uncertainty about whether recent improvements will last, but most — outside of commercial real estate — expect recovery to take hold in 2010.”

By sector:

• A number of retailers told the researchers “consumers are much more cautious than in previous years.” And executives in the category worried about the impact of unemployment on consumer spending.

Several retail concacts told the researchers they are maintaining lower inventory levels than a year ago.

Capital spending in the sector is “guarded,” the Fed team wrote, though there is some spending planned on renovations and IT.

“Seasonal hiring is mixed,” the report states. “Wages remain mostly steady, although one respondent reports wage cuts were successfully taken in order to prevent a cut in headcount. Selling prices are reportedly stable.”

• In manufacturing, the report states, “biopharmaceuticals companies indicate that their revenues continue to increase. Some equipment makers report that sales have picked up from their depressed levels in the first half of the year, while others say their business remains in a slump.”

The researchers wrote: “Respondents across a variety of industries note that sales to retailers, restaurants, and personal services establishments remain depressed.”

Materials costs and selling prices remained largely unchanged.

“Some firms that cut wages and salaries earlier in 2009 have recently restored pay to pre-cut levels or plan to do so in 2010,” the researchers wrote. “Most contacts say that they have held their domestic headcounts relatively steady in recent months, but biopharmaceutical firms continue to expand employment.”

They add: “Some seeking to fill specialized technical positions indicate they are disappointed with the quality of the applicant pool.”

“For the most part, capital spending remains subdued,” the report states. “Many note that they have adequate cash to fund both needed and discretionary investments.”

For the sector, it concludes: “Most manufacturers and related services providers are anticipating modest to moderate revenue increases over the coming six to 12 months.”

• Software and Information Technology Services could see some new hiring in 2010.

“Those firms that implemented wage freezes this year anticipate lifting them in 2010, with raises expected to be in the 3-percent to 5-percent range,” the report states.

It states: “Expectations range from gradual upticks over the course of 2010 to high levels of growth from the start of the year.

• “New England staffing contacts report upticks in activity through the end of the third quarter and

into the fourth,” the report states. “While year-over-year revenues are still down — from 10 percent to 60 percent — revenues are improving on a sequential basis, with increases reported in billing hours and number of assignments.”

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