British economic growth eased during the three months through July and may “soften” further in the coming months as fiscal consolidation takes hold, a leading think tank said Friday.

The U.K. economy expanded 0.9% during the May to July period, slower than the revised 1.1% growth for the quarter ending in June, the National Institute of Economic and Social Research, or NIESR, said.

The growth estimate for the three months ending in June has been revised up from 0.7% reported initially.

“We expect GDP growth to soften over the coming months as the effects of fiscal consolidation take hold” the NIESR said.

The institute expects output to remain below its peak for some more time, and it is unlikely to pass its early 2008 peak until 2012.

The annual rate of growth also eased during the three month ending in July, as GDP rose 3.5%, slower than the revised 4.6% growth during the quarter ending in June. The earlier estimate was for 2.9% growth.

Official data showed that the British economy expanded at a pace of 1.1% sequentially in the second quarter following an increase of 0.3% in the previous quarter.

Late last month, the NIESR forecast that the British economy would grow at a slower pace than the government’s projections in the coming years.

The institute now sees 1.3% growth this year, up from 1% growth projected in April. The latest growth projection is slightly stronger than the 1.2% expansion forecast by the government. The NIESR expects 0.1% and 0.3% quarterly growth in the third and fourth quarters of 2010.

However, the institute also downgraded its growth outlook for 2011 to 1.7% from 2%. For 2012, growth is seen at 2.2%. The government has projected 2.3% growth for next year and 2.8% in 2012.

Meanwhile, figures released by the Office for National Statistics on Friday revealed that manufacturing output increased for a second month in a row, although maintenance work in the oil fields dragged down the rate of growth in June. Output price inflation eased slightly in July, suggesting easing inflationary pressures.

Yesterday, the Bank of England left its key interest rate unchanged at a historic low of 0.5% and maintained the size of the quantitative easing at 200 billion pounds, indicating that despite an acceleration in economic growth, policy makers were cautious about the sustainability of the recovery amid a severe fiscal squeeze.

From July 1, the banking sector moved into this new interest rate regime. Prabhakar Sinha explains how it can benefit borrowers

Anew interest rate regime kicked off when the country moved to the Reserve Bank of India (RBI) mandated system of base rate, which is likely to be a more objective interest rate benchmark than the one currently followed – benchmark prime lending rate (BPLR) system. It is also believed that compared to the BPLR system, the base rate regime will bring in more transparency in fixing a rate in the banking system.

In the new regime, interest rates will be benchmarked to base rates with all the lending rates linked to the respective base rates of each bank. This is with effect from July 1. The interest rates on your loan have been fixed against the benchmark rate. Assuming that your present interest rate is nine percent and the bank has fixed the base rate at 7.5 percent, your interest rate will be termed as 1.5 percentage points higher than the base rate. Banks did not hike the mortgage rates, instead, they just pegged them as against their respective base rates. In fact, the new system is likely t
In fact, when the rates are rising, they cannot change it immediately but will have to wait for the new quarter to start. This system has already benefited existing customers. Most banks have announced the base rates on July 1 and 2.

Just after their announcements, the RBI increased the policy rates to make the funds costly. But, now banks cannot change the base rate for the next three months. So, the existing customers will continue to pay the present rate.
Suppose your home loan is at nine percent and the base rate of your bank is 7.5 percent. This means the bank has fixed your rate 1.5 percent higher than the base rate. Now, as the banks can’t change the base rate, you will continue to pay nine percent. But as the cost of fund has gone up, banks might decide to charge higher rates at 9.5 percent from new borrowers by raising the premium over the base rate from the existing level of 1.5 to two percent.

Indonesian companies say bank lending rates that are well above Bank Indonesia’s benchmark rate are putting them at a disadvantage to their regional counterparts and hampering private-sector growth.

The central bank has cut its benchmark rate from a record high of 12.75 percent to 6.5 percent by last August, its lowest level since its introduction in July 2005.

But the average bank lending rate was still 12.5 percent in June, down from 14.43 percent in January. Domestic companies say this is still not low enough.

“Ideally for businesses, lending rates should be closer to the benchmark interest rate, so it should be in the single digits” said Ernovian Ismy, secretary general of the Indonesian Textile Producers Association (API).

“The relatively high lending rates are reducing the competitiveness of our industry” he said.

In a sign that Indonesian businesses are finding the rates too high, the level of undisbursed loans by Indonesian banks has stayed stubbornly high.

As of April, undisbursed loans stood at Rp 474.23 trillion ($52 billion) ” 32 percent of the total loans approved by all Indonesian lenders. The figure has risen by 27 percent from Rp 373.72 trillion in April last year.

Sugiarto Kasman, director of cooking oil producer PT Panca Nabati Prakarsa, said the high lending rates were making some Indonesian companies hesitant to take on additional risk, with many companies seeking to borrow money from overseas lenders that offer lower lending rates.

While the benchmark rate has come down from its highs, it is still relatively high compared to neighboring countries.

Malaysia’s benchmark rate is 2.5 percent and China’s is 5.31 percent. The Philippine’s benchmark is 4 percent, Thailand’s is 1.25 percent and Singapore’s just 0.13 percent. Lending interest rates in Singapore are in the 2.5 percent to 3 percent range, while in Malaysia it’s about 6 percent.

Indonesian exporters say lower lending rates would make their products more competitive abroad.

“The relatively high lending rates affect the competitiveness of both the price and quality of the products we export” said Jovian Agustinus, a director at PT 54 Resources, a mid-size company that exports organic vegetables to Singapore.

“To compete with locally made products in export target countries, we have to put a priority on quality and have a competitive price” he said.

“It’s hard to produce quality products cheaply with the high lending rates.”

The chairman of the Indonesian Cement Producers Association (ASI), Urip Timuryono, said if bank lending rates dropped to below 10 percent it would reduce monthly operational costs by 10 percent to 20 percent, allowing companies to allocate more funding to other needs.

PT Bank Central Asia’s director of credit, Dhalia Ariotedjo, said in May that bank lending rates were starting to fall because Bank Indonesia was encouraging banks to lower rates, fostering competition between lenders.

Fadil Hasan, an economist at the Institute for Development of Economics and Finance, said one of the reasons commercial banks had not decreased their lending rates more was because the competition between banks had only recently started to heat up.

“The increased competition has evidently led to the decreased lending rates, which will stimulate businesses due to the lesser burden” he said.

Standard Chartered Bank Indonesia economist Eric Alexander Sugandi said Indonesia’s relatively high benchmark interest rate was partly due to the country’s inflation rate, which was 2.78 percent in 2009.

By comparison, Singapore’s inflation rate in 2009 was 0.9 percent, while Malaysia’s was 0.4 percent.

Eric said that he expected bank lending rates to stay in the 12 percent to 13 percent range for the rest of the year.

Fadil said: “The government and central bank just need to keep an eye on the inflation rate that could begin to creep upward as a result of increased economic and business activity.”

The announcement of the award of National Honour on the Governor of the Central Bank of Nigeria, Sanusi Lamido Sanusi, raised interest at the money market last week. Dealing banks, traders as well as investors in the market, local and international, were concerned about the implication of the recognition on the current state of the market in the medium and long-term.

Although cost of funds remains high in the money market, THISDAY investigations revealed that some banks have actually cut their lending rates significantly to make it easy for big corporations to access funds, hitherto starched in their coffers.The big corporates, mainly the prime customers of the banks with thriving businesses in the food sector, manufacturing and processing, telecommunications and services among others, are accessing credit from banks at rates in the region of 11 per cent per annum, which is quite low compared to average maximum lending rate in the market at over 20 per cent.

A treasury with one of the banks explained: “There is no high risk premium on the transactions, unlike when lending to other customers of the bank.” He added: “These are people and organisations that the banks have been dealing with, have come to understand their businesses and can predict the future. Remember that the operating business environment in Nigeria is difficult and so when a customer comes to the bank to borrow money, he doesn’t just have to contend with the cost of the funds to the bank but the risks associated with his business, since a bank puts all that into consideration before arriving at the interest rate” he said.

The Central Bank of Nigeria (CBN) noted at the end of its monetary policy committee meeting last week that developments in interest rates structure indicated that the retail lending rates were still relatively high even though they were declining.According to the Committee, average maximum lending rate dropped to 22.56 per cent in May 2010, from 23.45 per cent in December, 2009. Also, average prime lending rate fell to 18.77 per cent in May 2010, from 19.03 per cent in December 2009.The result of trading activities at the inter-bank money market showed Nigerian Inter-bank Offer Rates (NIBOR), which had remained at about 1 to 2 per cent increasing last week.

The inter-bank lending rates rose to 8.25 per cent on average from 2 per cent the previous week after NNPC caused a major outflow, by withdrawing about N100 billion from the system. There was outflow to foreign exchange and fixed income securities purchases. There was also a dry up of the fiscal inflow in the system, both factors causing the rates to rise, one of the traders said.The NNPC reportedly sold about $600 million to some banks in the last two weeks and recalled part of the naira proceeds to its CBN account last week in compliance with CBN’s monetary control measures.

At the foreign exchange market, the naira, which gained 5 kobo at the first bi-weekly auction last Monday lost the 5 kobo at the second auction (last Wednesday) to exchange N148.50/$1. At the inter-bank market, the naira eased to N150.22 to the dollar from 149.70, which ended its two-week rally against the dollar.

Interest, Lending, Inter-bank, Securities Trading

As stated earlier, the big corporates majorly – the prime customers of banks with thriving businesses in the food sector, manufacturing and processing, telecommunications and services among others are accessing credit from banks at rates in the region of 11 per cent per annum, which is quite low compared to average maximum lending rate in the market at over 20 per cent. But lending rate to the private sector remains high, with the flow of credit falling to the very low levels.

The CBN in its market and economy review last week noted that as at May, 2010 aggregate domestic credit (net) grew by 12.38 per cent over the December 2009 level, and by 29.72 per cent when annualised, which was still below the 2010 indicative target of 55.54 per cent. Credit to government (net), which grew substantially by 50.87 per cent over end-December 2009 (or 122.1 per cent on annualised basis), was the major contributor. Credit to the private sector declined by 1.88 per cent (or 4.51 per cent on annualided basis), in contrast to the growth benchmark of 31.54 per cent for 2010.

The CBN further disclosed that the substantial growth of credit to government (net) against the backdrop of declining private sector credit reflected the risk aversion of banks to lending to non-government borrowers, adding that the “Committee believes that in order to provide the private sector with the necessary credit to grow the economy, further efforts are needed to unlock the credit market in order to enhance the flow of credit to the real economy.

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Nigeria’s central bank kept its benchmark interest rate unchanged as it prepares to buy toxic debt from commercial banks to revive lending.

The monetary policy rate was left at 6 percent, Lamido Sanusi, governor of the Central Bank of Nigeria, said today at a briefing in Abuja, the capital. The main lending rate to commercial banks will be maintained at 8 percent and the borrowing rate at 1 percent.

The West African country’s Senate on June 23 approved a law to set up a state-owned company that will buy the debts from banks. The bank will clear $10 billion of toxic assets from the system this year, at a cost of about $5 billion, the governor said on July 1. The legislation is expected to get President Goodluck Jonathan’s approval soon, according to a central bank statement.

The debt purchases will “reflate the economy” Sanusi said. “Each bank has shown improved profitability compared with last year.”

The central bank fired the top managers of eight of the country’s 24 lenders last year and gave the industry an injection of 620 billion naira ($4.1 billion) to stem the decline.

Bank lending has been slow to recover. Credit to private industry fell in January, February and March, before gaining 0.3 percent in April, according to the central bank website.

Exchange Rate

The central bank is also likely to maintain its current exchange rate policy, which has kept the naira at about 150 to the dollar since February 2009, and helped maintain inflation between 10.4 percent and 13 percent since June, Sanusi said last week.

“It would be wise not to disrupt the balance” he said.

The inflation rate declined to 11 percent in May from 12.5 percent a month earlier.

The inflation and lending outlooks “have not changed significantly, so there is no real need to change anything at present” David Cowan, Citigroup’s Africa economist, said in an e-mail.

Nigeria’s economy, the second-largest in sub-Saharan Africa after South Africa, grew 7.2 percent in the first quarter and 7.4 percent in the previous three months, as oil production increased following a decline in attacks in the Niger Delta. Nigeria is the continent’s top oil producer and the fifth- largest supplier of U.S. crude imports.

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The country’s largest bank, State Bank of India (SBI), will fix its base rate at around 8%, bank chairman OP Bhatt said on Friday, hinting that lending rates might go up and that borrowers may have to pay more. The bank’s board will meet in Mumbai on Saturday to discuss the issue and a final decision would be taken by June 15, Bhatt said. The SBI chairman, however, observed that there was no consensus on the rate after a meeting of leading public sector banks at SBI’s headquarters in the city.

“We will fix our rates around 8% and will calculate the rate on the basis of the cost of deposits” said Bhatt after chairing the bankers’ meet, adding there is an upward bias to interest rates. Bhatt had earlier said that the bank would fix the rate so that the bank remained competitive. Currently, a one-year term deposit in SBI fetches an interest rate of 6%, while a 181-day deposit fetches 5.25% and a 91-day deposit earns 4.75%.

KR Kamath, chairman of Delhi-based Punjab National Bank, had said about a month back that it may fix its rate between 8.5% and 9%. Analysts believe that private sector banks may be able to fix their base rates at slightly lower levels than those of public sector banks, given that they are relatively cost-efficient and would like to be competitive.

From July, the Benchmark Prime Lending Rate (BPLR) will no longer be applicable and all banks will have to lend to customers with the base rate as the floor. Banks will get time to adjust to the new system though, but will need to be transparent on how they arrive at the rate.

One of the reasons for the new system being introduced is that the earlier method of computing the rate was not transparent enough. While in the initial draft guidelines the central bank had proposed some criteria for arriving at the base rate, it has subsequently allowed banks to choose whatever criteria they consider relevant while fixing the rate. The base rate can be changed every quarter if banks feel necessary in the context of the interest rate environment.

U.S. Rates and Averages

Rates on fixed rate mortgages remain low according to the most recent survey of American lenders released by Freddie Mac. The weekly survey indicates that the national average on the 30-year fixed rate mortgage stands at 4.79%, up one basis point from last week’s average of 4.78%. The national average on the 15-year fixed mortgage fell to 4.20%, which marks a record low since Freddie Mac began the survey of lenders almost twenty years ago. Interest rates on variable-rate mortgages also remain after low after common benchmarks, the LIBOR rate and yields on 10-year Treasury notes, fell this week. The latest interest rate decrease could provide a final chance for Americans to refinance their mortgage before fixed rate mortgage rates increase again. Check MoneyRates.com for the best mortgage rate deals.

Continued global concern over the debt issued from European countries has helped push US Treasury yields lower as investors seek the perceived safety of Treasury securities. Mortgage rates, which typically move in the same direction as treasury yields, have benefited from the flight-to-quality. However, economists are still warning that mortgage rates could increase later this year. The rates on 30-year fixed rate mortgages are expected to increase to as high as 5.25% before the end of the year according to several leading economists. The expected jump in mortgages rates is largely attributed to an expected increase in economic growth in the US and the end of intervention by the US government in the mortgage securities industry.

Consumers can still benefit from the low rates on personal loans, corporate loans, credit cards, and variable-rate mortgages. Savers, on the other hand, are likely to have to wait longer for higher CD rates, money market rates, and savings rates. Most banks will increase deposit rates when the Fed raises rates or when economic activity increases the demand for bank loans. When this scenario does occur, CD investors who buy CDs with terms of two years or longer could be the first to see higher rates from the steepening interest rate yield curve. Check MoneyRates.com daily for the latest interest rate news and forecasts.

Global Interest Rate Report

The Bank of Canada lifted their benchmark overnight lending rate a quarter point to 0.50% this week becoming the first Group of Seven central bank to increase interest rates since the credit crisis began in the summer of 2008. The widely anticipated move by the Canadians is in response to a growing economy and increasing domestic spending. Canada is not the only country to have increased rates this year, in Australia the central bank has increased the benchmark short-term interest rate six times over the course of their last seven meetings in response to the country’s high inflation rate. European bankers continue to watch for more fallback from the financial crisis in Greece. European countries, with their closely linked monetary systems, are susceptible to each other’s financial problems. Consequently, long term interest rates are expected to increase in Italy, Portugal, and Spain as debt holders evaluate the financial condition of those countries and demand higher yields to compensate for the risk of government defaults on debt obligations.