Financial thoughts

Malaysia's central bank kept its benchmark interest rate unchanged for a 15th straight meeting as accelerating inflation and strong domestic demand weaken the case for a cut in borrowing costs.

Bank Negara Malaysia held its overnight policy rate at 3.5 percent, according to a statement in Kuala Lumpur today. The decision was expected by all 15 economists in a Bloomberg survey.

“The latest indicators show strong domestic demand will provide the support for the Malaysian economy to perform well in the coming months,'' the central bank said. “Commodity and food prices have continued their upward trend, and this is contributing to higher global inflation.''

Malaysia's inflation is near a 10-month high, preventing the central bank from cutting borrowing costs even as weakening U.S. demand threatens growth in Southeast Asia's third-largest economy. Exports from Malaysia grew in December at the slowest pace in three months as shipments to the U.S. plunged 19 percent.

“Bank Negara is balancing global growth concerns with those from inflation,'' said Matthew Hildebrandt, an economist at JPMorgan Chase Bank in Singapore. “Until risks from either global growth or inflation move decisively in one direction, I expect Bank Negara to remain sidelined.''

Malaysia's ringgit rose to 3.2160 against the dollar as at 5:37 p.m. today, compared with 3.2170 late yesterday on anticipation the central bank would keep its key rate unchanged, giving the country an advantage of half a percentage point over the U.S. benchmark rate, the most since December 2004.

Fresh Mandate

Prime Minister Abdullah Ahmad Badawi, who is seeking a fresh mandate for his ruling coalition in March 8 elections, may also want to avoid increases in interest rates that may hurt domestic demand, even as surging global commodity costs may push prices up further and force the government to raise fuel prices.

“We expect Bank Negara to remain on hold this year,'' said Wai Ho Leong, an economist at Barclays Capital in Singapore no qualifying payday advance. With elections in March, “monetary policy will be focused on maintaining the momentum of domestic demand, supported by higher fiscal expenditure.''

Further increases in interest rates could dampen private consumption, which is currently a key driver of economic growth, Leong said.

Malaysia's economy, Southeast Asia's third biggest, grew 6.7 percent from a year ago in the third quarter, the fastest pace in three years, as rising government and consumer spending countered weaker manufactured exports.

Fuel Prices

Inflation may average 2.9 percent this year, up from 2 percent in 2007, according to the median forecast of 14 economists in a Bloomberg survey. If Malaysia's government raises fuel prices this year, inflation may reach as high as 3.8 percent in 2008, CIMB Investment Bank Bhd. estimates.

Accelerating global inflation will affect Malaysian inflation in the first half of 2008, but will ease as global growth slows, the central bank said today.

“The risks to the Malaysian economy are primarily from the external sector,'' Bank Negara said. “The heightened downside risks to global growth have been affirmed by the latest data released by the large industrial countries.''

Malaysia's key interest rate is at its highest since being introduced in April 2004, after policy makers lifted it three times from November 2005 to April 2006 to curb inflation.

The central bank's present monetary policy remains “supportive of growth,'' Bank Negara said. “Overall, there continues to be a high degree of uncertainty regarding the macroeconomic environment over the policy horizon.''

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HLTH Corp. said Thursday it will merge into its subsidiary WebMD Health Corp. in a cash-and-stock deal valued at about $2.31 billion.

Health-information company HLTH already owns a majority stake in WebMD, the Internet health-information provider. Late last year, Elmwood Park, N.J.-based HLTH said it would likely propose a merger in which it would become part of New York-based WebMD.

Upon completion of the merger, HLTH shareholders will own about 80% of WebMD, based on the shares currently outstanding at HLTH and WebMD.

As part of the transaction, each outstanding share of HLTH common stock will be converted into 0.1979 shares of WebMD common stock and $6.89 in cash, subject to adjustment. The total value of the deal is based on the number of HLTH’s outstanding shares as of Nov. 6.

The merger will eliminate both the controlling class of WebMD stock held by HLTH and WebMD’s existing dual-class stock structure.

The merger is expected to reduce WebMD’s share count by 20%, to eliminate HLTH’s controlling interest in WebMD and to capitalize WebMD with about $700 million in cash and investments, said Martin Wygod, chairman and acting chief executive of HLTH and chairman of WebMD, in a press release.

Based on Wednesday’s closing prices, HLTH shareholders will receive a 26% premium for their shares and direct ownership in WebMD no fax payday loans.

Thursday’s announcement was a bit surprising, after HLTH said earlier this month its planned acquisition of WebMD may not occur because of a negotiation stalemate.

Meanwhile, HLTH also said Thursday it plans to spin off two health businesses: ViPS and Porex.

If either ViPS or Porex has not been sold at the time the HLTH-WebMD merger is ready to be completed, WebMD may issue up to $250 million in redeemable notes to the HLTH shareholders in lieu of a portion of the cash.

WebMD’s senior management team will continue to lead the organization under Wayne Gattinella, president and CEO.

WebMD currently operates as a separate public company and, after a transition period, does not expect to incur significant incremental recurring expenses as a result of the merger, other than certain noncash expenses.

The transaction is expected to close in the second or third quarter of 2008.

Shares of HLTH (HLTH) rose $1.58, or 15.7%, to $11.63 in premarket trading after closing at $10.05 Wednesday, and shares of WebMD (WBMD) fell $1.08, or 3.7%, to $27.90 after closing at $28.98 Wednesday. 

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The boards of directors of Delta Air Lines and Northwest Airlines are expected to vote Wednesday on a combination - provided their pilot unions can reach their own integration deal by then, people briefed on the discussions said Tuesday.

If the pilot agreement can’t be reached by the time of the meeting, the boards were expected to just get an update on the status of merger talks between the two airlines, according to three people familiar with the situation who asked not to be named because the talks were in a sensitive stage.

A fourth person familiar with the talks also confirmed that Delta’s board was expected to meet Wednesday, and the company is mulling a Thursday announcement if everything falls into place.

As of midday Tuesday, there was no deal between the pilots unions, according to one of the people briefed on the talks.

Another person briefed on the talks said that as far as the aftermath of a combination of Delta and Northwest is concerned, there would be staff reductions at the senior level only. At the bottom levels, there will be very little change, the person said.

Delta has said that if it combines with another carrier, it wants to keep the airline based in Atlanta and called Delta. Officially, all it has said in recent weeks is that its board is considering strategic options, including a possible consolidation transaction.

A Delta spokeswoman did not immediately return two calls Tuesday seeking comment.

Talk of airline consolidation has heightened in recent months amid persistently high fuel prices, which are eating away at the industry’s bottom line.

A combination of Atlanta-based Delta and Eagan, Minn.-based Northwest would create the world’s largest airline in terms of traffic. That’s before any divestitures regulators might require them to make if they combine. There also has been speculation about a possible combination of Chicago-based UAL’s (UAUA, Fortune 500) United Airlines and Houston-based Continental Airlines (CAL, Fortune 500), which would make it a bigger airline than Delta-Northwest in terms of traffic.

The clock is ticking to get any deals accomplished quickly, some observers say payday loans. That’s because industry observers believe a combination has a better chance of surmounting the considerable political and regulatory hurdles under the current administration than under President Bush’s successor.

Delta and Northwest don’t need a labor agreement between their pilots unions before announcing a combination, but having one in place now could help them speed up the integration of the two carriers down the line.

The head of Delta’s pilots union said in a letter to members last week that in a typical situation once a corporate merger is publicly announced by the participating companies, each pilot group’s elected leadership would analyze the deal, seek input from advisers and eventually decide whether to oppose the combination or enter into the combination process.

He noted that US Airways (LCC, Fortune 500) and America West followed the typical approach following their 2005 announcement that the two carriers would combine, but nearly three years later a joint pilot contract has yet to be reached.

That, he said, has resulted in the pilots of those two carriers not being able to capture any meaningful value from the merger transaction.

The possibility of a Delta-Northwest combination has led Minnesota Gov. Tim Pawlenty to cancel an out-of-state trip.

Pawlenty was due to fly Tuesday to Las Vegas to address a renewable energy conference.

But his spokesman said the trip was called off because of "ongoing activities involving Northwest and Delta."

Spokesman Brian McClung said the administration hasn’t gotten any word that a deal is about to happen, but Pawlenty wants to "be able to stay in direct contact with staff and commissioners in case his involvement is needed."

The Republican governor said it’s too soon to say if he’ll fight the merger because he doesn’t know what a combined Northwest (NWA, Fortune 500)-Delta (DAL, Fortune 500) company would mean for Minnesota. Northwest employs 11,500 people in Minnesota. 

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Credit Suisse Group said Tuesday it has estimated the value of its assets to be $2.85 billion lower than previously calculated.

The Swiss bank said an internal review found some of its assets had been overpriced by traders.

The revaluation will have a net impact of about $1 billion on the company’s balance sheet, the bank said, adding that it expects to remain profitable in the first quarter of the year.

The bank said it has suspended "a handful" of traders in connection with the overvaluation of assets.

A spokesman for Switzerland’s second largest bank said that a small number of traders were being investigated for overvaluing asset-backed securities on its balance sheet payday loan.

"I can’t tell you exactly how many, but a small number," Credit Suisse spokesman Marc Dosch told The Associated Press.

Shares in the bank dropped sharply Tuesday following the announcement that the misvaluation will reduce earnings in the first quarter.

Credit Suisse last week announced a $1.88 billion writedown for subprime-related assets, but still posted a fourth-quarter net profit of $1.2 billion. 

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Congress waded into the bond insurer saga Thursday as lawmakers tried to assign blame and prescribe a remedy for the evolving crisis.

Leading the witness list was New York Gov. Eliot Spitzer, who told lawmakers that the cascading financial woes facing troubled bond insurers "threaten serious problems well beyond" Wall Street.

"The problems in this market will affect many average Americans," Spitzer said. "It will affect the cost of college loans. It will affect museum budgets. It will affect state and local taxes."

Executives from bond insurance firms Ambac (ABK) and MBIA (MBI) also testified before the House Financial Services Committee panel. The hearing was marked by finger-pointing - with the bond insurers themselves, insurance regulators and short-selling investors who bet on the insurers’ fates among those targeted for blame.

Meanwhile, Moody’s Investors Services announced Thursday that it had downgraded bond insurer FGIC to ‘A3′ from ‘AAA.’ Moody’s cited the company’s weakened capital position and its exposure to the mortgage market.

Moody’s, however, made a point of stressing that rivals Ambac and MBIA, which remain under review for possible downgrades, were better positioned than FGIC.

Riding the market

Ambac, MBIA and FGIC in recent years had backed billions of dollars worth of toxic mortgage-backed securities that have lost value. Fearful the bond insurers will face a capital shortfall as a result, rating agencies like Standard & Poor’s and Moody’s Investor Service have threatened to strip them of their top-notch ‘AAA’ ratings.

Such downgrades would not only cripple the insurers’ municipal and corporate debt insurance business, but would spread across the broader financial landscape. Major U.S. financial institutions, which have already lost billions as a result of the credit crisis, would face further writedowns as a result.

A downgrade would most likely spread to Main Street, as well. Municipalities, which issue bonds to pay for public projects like repairing bridges or building schools, would have to pay more to issue debt. It could also lead to tighter lending standards and could create an additional drag on the already troubled U.S. economy.

Some of the bond insurers, however, have stressed threat they remain well capitalized to not only handle existing claims but sustain their top-notch rating.

MBIA has retained its ‘AAA’ rating for 34 years and "it expects to remain so now and for the the foreseeable future," MBIA Chief Financial Officer Charles Chaplin told lawmakers.

Just a day earlier, MBIA announced that it had completed the sale of 94.6 million shares of its common stock as part of an effort to raise $1.1 billion to bolster its capital position.

Ambac Chief Executive Michael Callen offered similar reassurances paydayloans.

"There is no question of solvency," Callen said in a televised interview with CNBC. "This is all based on various people’s projections of where the mortgage markets are going to go."

Both Callen and MBIA’s Chaplin also fired back at short-sellers, who profit when a company’s stock declines. Bill Ackman, a hedge fund manager and perennial bond insurer critic at Pershing Capital Management, was also scheduled to testify Thursday.

‘The clock is ticking’

Spitzer took the opportunity to tell lawmakers that "the clock is ticking" on various efforts underway to shore up the industry.

Among those spearheading rescue efforts has been Eric Dinallo, New York’s top insurance regulator, who is attempting to organize a private-sector rescue of the troubled industry.

Dinallo told the panel that a government bailout is not planned and that he was working hard to fashion agreement between the parties involved.

Spitzer said if no recapitalization plan is reached, there always remained a "good bank-bad bank" option. Such an option, aimed at protecting the insurers’ municipal bond customers, would split the bond insurers into two companies: one focused on their sound municipal bond business, the other on the troubled structured finance portion of their portfolios.

Billionaire investor Warren Buffett proposed such a remedy just two days ago but at a steep premium. Buffett offered to take over the liabilities of the three largest bond insurers - widely believed to be Ambac, MBIA and FGIC - by reinsuring about $800 billion of their tax-exempt or municipal bonds.

So far, none of the companies have accepted the deal.

"While we are happy that there is the offer from Mr. Buffett and that others could step in, we are also hopeful in a result that does not require that sort of division," Spitzer told lawmakers.

Buffett was invited to appear at Thursday’s hearing but was unable to attend, according to to the office of Rep. Paul Kanjorski, D-Pa., who chaired the session.

During his opening remarks, Kanjorski offered up the idea of creating a federal bond insurance agency, through which the federal government would guarantee against bond defaults. He likened it to how the Federal Deposit Insurance Corp. protects consumers from bank defaults.

"We need to prevent a similar situation from happening again in the future," said Kanjorski. 

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Tribune Co. employees were notified Wednesday that hundreds of jobs will be cut at the Chicago Tribune, Los Angeles Times and other publications - the first cutbacks since billionaire Sam Zell took the media company private last year.

In separate memos, Tribune Publisher Scott Smith said 100 jobs would be cut and his counterpart at the Times, David Hiller, said 100-150 jobs would be eliminated.

Meanwhile, both newspapers reported a total of 400-500 cuts companywide, focusing on corporate staff, the two newspapers and the company’s seven other papers, including Newsday in New York, the Orlando Sentinal, Baltimore Sun and Hartford Courant.

Tribune Co. spokesman Gary Weitman declined to comment on that figure.

The media conglomerate also owns two dozen TV stations and the Chicago Cubs baseball team. Its interactive division oversees the company’s TV and newspaper sites, plus various special interest sites that feature local sports, entertainment and dining information.

Cuts in Chicago are expected to come from the Tribune, as well as Hoy in Chicago, RedEye, Chicago Magazine and online products such as ChicagoTribune.com, according to Chicago Tribune Media Group spokesman Michael Dizon. The group has about 3,000 employees, Dizon said.

He said it was unclear just how many cuts would come from simply not filling current openings, layoffs and from voluntary or involuntary severance packages.

In Los Angeles, Hiller said the cuts would be made in much the same way: attrition, voluntary buyouts and layoffs. There, the cuts will be made throughout the Los Angeles Times Media Group, which has 3,600 employees at the Times, weekly newspapers, Hoy in Los Angeles and latimes.com, according to spokeswoman Nancy Sullivan.

Both publishers’ memos cited economic problems at the papers, with Smith, for example, telling staffers that total revenue from the Chicago media group was down 5% in January and that "ad revenue was down double digits, a continuation of the trend late last year."

He also said cash flow had dropped more than the 8% it fell in 2007 cheap payday loans. Further, he said, "The near term outlook shows few signs of improvement."

And Hiller said the economic picture was "well worse than was forecast" late last year when real estate magnate Zell took Tribune Co. private in an $8.2 billion buyout.

The cuts come just weeks after Los Angeles Times Editor James O’Shea left the paper, with O’Shea saying he was fired after rejecting a management order to cut the newsroom budget and Hiller characterizing O’Shea’s departure as voluntary.

In one of a series of regular "Talk to Sam" e-mails sent to staffers, Zell explained the need for the cuts Wednesday.

Zell, who has said he was not interested in widespread cost-slashing, wrote that the "weak economy and significant declines in advertising volume at our newspapers" have hurt cash flow.

"Unfortunately, I can’t turn this ship from its course of the past 10 years within just a few months," he wrote. "Further, while I will do everything in my power to drive, pull and drag this company forward, I can’t promise we won’t see additional position eliminations in the future, if we continue at our current rate of cash flow decline."

But Zell, who said most of the cuts will come from what he called "support service areas" such as finance, human resources and technology, sounded a hopeful note, even saying he wanted the company to eventually add staffers.

"This," he said of the cuts, "is not my ultimate strategy for our company. I believe we can achieve greatness. I have staked my reputation on it." 

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The U.K. inflation rate probably rose to a seven-month high in January, limiting policy makers' scope to lower interest rates to counter the economic slowdown.

Consumer prices probably increased 2.3 percent from a year earlier, exceeding the Bank of England's 2 percent target for a fourth month, according to the median forecast of 36 economists in a Bloomberg News survey. The Office for National Statistics will release the data tomorrow in London, a day before the central bank publishes economic forecasts.

The bank cut the benchmark interest rate by a quarter point last week to 5.25 percent. It was the second reduction since the start of December to limit the fallout of the U.S. housing slump on the British economy. Policy makers are weighing that risk against the threat of consumer-prices getting out of control.

“The risk is that high inflation rates keep expectations high, making it more difficult for the Bank of England to bring the rate down to target,'' said Nick Kounis, an economist at Fortis Bank in London and former U.K. Treasury official. “We see, at most, two more rate cuts this year.''

The pound rose as much as 0.5 percent today on concern inflation pressures may limit the extent for further rate cuts, after a government report showed factories increased their prices at the fastest annual pace since 1991. The currency traded at $1.9504 as of 12:12 p.m. in London today.

Inflation Risk

The central bank said after its Feb. 7 rate decision there was a “risk that elevated inflation expectations keep inflation above target.'' Consumers forecast prices will rise 3.3 percent this year, the highest since at least 2005, a YouGov Plc survey last month showed.

Inflation may accelerate after oil prices reached $100 a barrel last month, and power providers raised energy costs for consumers. E.ON AG said Feb. 7 its U.K. unit would increase electricity prices by 9.7 percent and gas costs by 15 percent, making it the fifth of the country's six biggest energy retailers to charge customers more.

Manufacturers are also raising prices. Producer prices for goods including chemicals, textiles and food rose 1 percent in January on the month, the most since 1995, and 5.7 percent from a year earlier, the Office for National Statistics said in London today us fast cash. The cost of raw materials increased an annual 19.1 percent, the most since records began in 1986.

Bank of England Governor Mervyn King said Jan. 22 that policy makers face “a difficult balancing act'' as they gauge the risk that inflation may accelerate above 3 percent to match a decade-high. That would require him to write an open letter of explanation to Chancellor of the Exchequer Alistair Darling.

Pay Pressure

The bank is watching for price pressures in the labor market. Pay data released on Feb. 13 will probably show wages, excluding bonuses, rose an annual 3.7 percent in the fourth quarter, compared with 3.6 percent in the three months through November, the median of 20 economists' forecasts shows.

“The private sector won't be able to give in to wage increases that aren't justified by stronger production growth,'' said Peter Dixon, an economist at Commerzbank AG in London. “There are obvious inflation concerns, but the risk is to growth.''

Britain's economic expansion cooled to 0.5 percent in the three months through January, the slowest pace since 2005, the National Institute for Economic and Social Research said Feb. 8.

The Bank of England predicted in November that economic growth will weaken to about 2 percent this year from 3.1 percent in 2007. King will present new forecasts at a televised press conference on Feb. 13 in London.

“The Monetary Policy Committee is bound to cut their growth forecast'' in the inflation report, Michael Saunders, chief western European economist at Citigroup Inc., said in a research note. Still, policy makers will not “want to ease so fast that they stop the economy slowing in 2008 and produce a boom in 2009, because this would probably validate and extend the jump in inflation.''

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Canadian Finance Minister Jim Flaherty said he's concerned about “upward pressure'' on the nation's currency, as some investors bet the Bank of Canada won't match interest-rate cuts in the U.S.

“We want to avoid volatility and speculation of our currency,'' Flaherty, 58, said today in a Bloomberg Television interview in Tokyo. “I'm always concerned about upward pressure on the Canadian dollar.''

Canada's dollar yesterday jumped against its U.S. counterpart after a larger-than-expected increase in employment fueled speculation the Bank of Canada wouldn't follow the Federal Reserve's rate reductions, resulting in a wider rate advantage over the U.S.

The gap between Canadian and U.S. benchmark rates is the biggest since June 2004, after Fed Chairman Ben S. Bernanke eased by 1.25 percentage points to 3 percent in less than two weeks. The Bank of Canada, which has cut its rate twice since December, has said it may need to lower it again this year.

The central bank will have to “look at'' the growing differential between Canadian and U.S. interest rates, Flaherty said in the interview. “But it's up to him,'' he said, referring to Bank of Canada Governor Mark Carney.

More Jobs Added

The Canadian currency rose the most in more than two weeks against the U.S. dollar and gained against all 16 most-traded currencies. The government said yesterday the economy added 46,400 jobs last month. The increase, more than four times the median forecast in a Bloomberg News survey, pushed the jobless rate back to a 33-year low of 5.8 percent set in October.

Canada's job gain contrasts with a U.S. Labor Department report last week saying the world's largest economy lost 17,000 jobs in January, the first decline in more than four years.

Investors yesterday scaled back bets on how much Carney will cut the central bank's benchmark rate of 4 percent in the next few months. The yield on the bankers' acceptance contract due in March rose 5 basis points to 3.68 percent yesterday on the Montreal Exchange. There are 100 basis points in a percentage point pay day loans.

“There is no doubt that the Canadian economy is much more robust than the U.S.,'' said Alan Ruskin, Greenwich, Connecticut-based chief international strategist at RBS Greenwich Capital Markets.

Currency's Gains

Canada's dollar advanced 0.93 percent to 99.94 Canadian cents per U.S. dollar at the close of trading in Toronto yesterday. It traded at a two-week low of $1.0087 on Thursday, on concern a U.S. slowdown will hurt the global economy.

Flaherty said he gets concerned “especially'' when the currency moves beyond the Bank of Canada's “range'' for the dollar, which he's defined in the past as somewhere between $1.02 and $1.05.

Flaherty is in Tokyo to attend a meeting today of finance ministers and central bank governors from the Group of Seven industrial nations.

European officials in Tokyo also expressed concern about their currency's gains. The euro has risen 11.5 percent against the dollar in the past year.

French Finance Minister Christine Lagarde said the stronger euro “continues to pose difficulties for European exporters.'' Joaquin Almunia, European Union commissioner for economic and monetary affairs, said the currency is trading above its “equilibrium.''

The slowdown in the U.S. will impact the Canadian economy and downside risks are “significant,'' Flaherty said. Still, the government is still on track to meet debt-reduction targets of C$10 billion ($10 billion) for the current fiscal year and C$3 billion annually in coming years, he said.

The government also is considering a capital gains tax break for investors promised by the ruling Conservative Party in the last election campaign.

“I really would like to do something on the capital gains side,'' Flaherty said. “It's a question, then, what is the best type of measure and what is affordable given the economic slowdown this year.''

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New Zealand's wages unexpectedly grew at a record pace in the fourth quarter as a labor shortage prompted companies to pay more to retain employees.

Wages for non-government workers, excluding overtime, increased 1.1 percent from the third quarter, when they rose 0.9 percent, according to Statistics New Zealand's labor cost index released in Wellington today. From a year earlier, wages gained 3.5 percent, the most since the series began in 1992.

Rising wages add to signs that inflation will remain beyond the 1 percent-to-3 percent range that Reserve Bank Governor Alan Bollard targets, dimming prospects he will cut borrowing costs this year. Bollard increased interest rates four times last year to a record 8.25 percent as a housing boom and worker shortage fanned spending and stoked prices.

“What we've seen today is going to make the Reserve Bank a little bit more nervous,'' said Nick Tuffley, chief economist at ASB Bank Ltd. in Auckland. “Top that with a strong employment report on Thursday and it suggests to me that there's very little chance of the Reserve Bank cutting rates this year.''

Pay rose faster than analysts predicted. The median forecast was for wages to climb 0.8 percent in the quarter and 3.2 percent from a year earlier, according to 11 economists surveyed by Bloomberg News.

New Zealand's dollar bought 79.35 U.S. cents at 5:35 p.m. in Wellington from 79.27 cents immediately before the report. Investors reduced bets on the size of a rate cut over the next year to 27 basis points from 32 points yesterday, according to a Credit Suisse index. A basis point is 0.01 percentage point.

Interest-Rate Forecasts

Last month, Bollard said annual inflation will remain above 3 percent this year. In December, he predicted it wouldn't fall under 3 percent until June 2009. Consumer prices climbed 3.2 percent in the fourth quarter from a year earlier.

Seven of 16 economists surveyed by Bloomberg News say the central bank will keep the official cash rate unchanged until next year. Seven predict a cut in 2008 and one expects borrowing costs to increase.

Fanning consumer spending, a net 48 percent of workers expected to be earning more in a year's time, Westpac Banking Corp paydayloans. and McDermott Miller Ltd. said in a report released Jan. 9. The net number subtracts those expecting to earn less from those expecting higher pay.

The prospect of rising wages has underpinned borrowing. Outstanding loans from the nation's banks rose 12.2 percent in December from a year earlier, the central bank said Jan. 30.

Labor Shortage

Bollard raised interest rates last year as the nation's jobless rate fell to a record-low 3.5 percent and wage growth accelerated. Paychecks have been boosted by a shortage of workers and high workforce-participation rates, which mean most of the people wanting a job have one, economists say.

Almost half of 464 companies surveyed by the New Zealand Institute of Economic Research in the fourth quarter said it was harder to find skilled workers than in the previous three months.

New Zealand's jobless rate was 3.6 percent in the fourth quarter, a report on Feb. 7 will probably show, according to the median estimate of 12 economists surveyed by Bloomberg News.

Thirty-eight percent of employers cited the need to match market rates and retain staff as reasons to increase wages, the statistics agency said today.

Including overtime, wages for non-government workers rose 1.1 percent from the third quarter, for a record annual increase of 3.4 percent, today's report showed. Economists expected a 0.9 percent gain in the quarter.

An experimental series based on reported salary and ordinary-time wage rates of non-government workers advanced 1.3 percent in the fourth quarter and 5 percent from a year earlier, Statistics New Zealand said.

The statistics bureau also released indicators showing the demand for labor increased in the fourth quarter.

The number of full-time equivalent employees climbed 2.9 percent from the third quarter. The number of total filled jobs increased 3 percent.

Total paid hours rose 1.3 percent, seasonally adjusted, from the third quarter, the statistics agency said.

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Faced with growing risks of recession, the Federal Reserve made its second deep interest-rate cut in a week and slashed a key short-term rate by a half-percentage point Wednesday.

U.S. stocks, which had been slightly lower ahead of the announcement, surged on news of the rate cut but ended lower after a volatile final two hours of trading.

The federal funds rate - an overnight bank lending rate that affects how much interest consumers pay on credit cards, home equity lines of credit and auto loans - was cut to 3.0% from 3.5%. The rate had stood at 5.25% only four months ago.

The discount rate, which is what banks pay to borrow directly from the Fed, was also cut by a half-point to 3.5% on Wednesday. The cut was made at the request of nine of the nation’s 12 Federal Reserve district bank presidents.

The Fed slashed both rates by three-quarters of a percentage point in an emergency move on Jan. 22.

One member of the Federal Open Market Committee, Dallas Fed President Richard Fisher, voted against Wednesday’s cut in the fed funds rate. He argued that rates should have been left unchanged after the series of rate cuts by the central bank in recent months. Fisher is generally seen as a so-called inflation hawk who is greatly concerned with maintaining price stability.

The Fed, in its statement explaining the cut, acknowledged that the risk of inflation needs to be monitored, but said that the majority of its members believed that price pressures will moderate in coming quarters.

The rate cuts were necessary because problems in the credit markets were putting a squeeze on both consumers and businesses, the Fed said. It added that it sees growing weakness in both the job market and the battered housing market.

"Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity," according to the statement. "However, downside risks to growth remain."

The Fed also appeared to hint that it will keep cutting rates if the economy shows more signs of decline.

"The committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks," the statement said.

Keith Hembre, chief economist for First American Funds, said the statement suggested a greater likelihood of more cuts than he was expecting.

"I thought that they would probably include some language to temper expectations of any additional cuts in the near term," he said cashadvance.com. "That statement makes it sounds like they’re still in motion."

Wall Street is now betting on more rate cuts in the next few months. According to federal funds futures trading on the Chicago Board of Trade, investors are pricing in a 100 percent chance of at least another quarter point cut by May and a 70 percent chance of rates being a half-point lower than there were after this move. The Fed is scheduled to meet next on March 18 and April 29-30, but has no meetings scheduled for May.

But one economist said that further rate cuts could be justified, and that it makes sense for the Fed to build on its emergency cut of a week ago, even if some see it as caving to market pressure.

"They could have gotten away with a quarter, but that risked undoing every thing they did a week earlier. They are now ahead of the curve," said Mark Vitner, senior economist with Wachovia. "

Vitner said he’s not surprised that the fed funds futures indicate that investors expect more cuts. "You give them an inch, and they want a mile," he said. But he’s also expecting a quarter point cut at each of the next two meetings.

"Given where the Fed says the risks lie, you have to ask yourself, ‘Are financials markets going be all that less stressed by March?’" he said. "I think the answer to that is, ‘Probably not.’"

But economists who are concerned about inflation criticized the Fed move, and its apparent lack of attention to price pressures.

"Higher prices are coming, even if the economy slows to a crawl," said Rich Yamarone, director of economic research at Argus Research. "We’ve seen price increases in company announcements, in our grocery bills and in the economic data. The Fed is telling you they’re going to watch it because that’s in their mandate. But I think they’ll turn a blind eye to that."

The rate cuts came on a day the government reported that economic growth slowed significantly in the last three months of 2007, matching its weakest performance of the past five years. It also comes as Congress rushes to pass a $150 billion economic stimulus package to spur spending by both consumers and businesses. 

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