Finance & Business World

Last year’s market meltdown loosened Wall Street’s decades-old grip on the prime brokerage business, and ferocious competition over supporting hedge funds means the old ranks may be shaken up for good.

The collapse of Bear Stearns and Lehman Brothers sparked a run on Morgan Stanley and to a lesser extent Goldman Sachs Group Inc, prompting hedge funds to move cash and securities to more stable appearing banks like Credit Suisse, Deutsche Bank and JPMorgan Chase & Co.

Goldman and Morgan Stanley quickly righted this year as markets snapped back, yet the second-tier players have no intention of giving up their newly won premier status, according to a series of interviews with Wall Street’s top prime brokerage executives.

“You had an industry that changed at a glacial pace for 20 years go through two years of rapid change,” said Barry Bausano, a Deutsche Bank co-head of global prime finance. “Over the past few months, the cement has set.”

Behind every hedge fund is at least one prime broker, which lends cash and securities as well as provides custody and other services. It is a high-margin business, one that will generate an estimated $8 billion this year and $10 billion next year, according to the research firm Tabb Group.

Hedge funds also taketh away, as seen last year when anxious fund managers fled the struggling Bear and Lehman and accelerated their collapse. In the darkest days of September, hedge funds worried Morgan and Goldman would be next.

Global Custodian magazine said 44 percent of hedge funds reduced balances with Goldman and 70 percent pulled back from Morgan Stanley.

According to Hedge Fund Intelligence, Goldman earlier this year was top of the heap with $108 billion in Americas hedge fund client assets, followed by JPMorgan at $97 billion, with Morgan Stanley slipping to third with $66 billion cash til payday loan.

What emerged was a new order, where JPMorgan, Credit Suisse, Deutsche and Swiss bank UBS AG which picked up meaningful market share in 2008.

“There is much more of an even distribution of business,” said Glen Dailey, head of prime brokerage at Jefferies Group Inc, a middle-market firm that also picked up share.

JPMorgan, which acquired a nearly bankrupt Bear Stearns in March 2008 and emerged as a Wall Street leader, gained a top domestic U.S. prime brokerage business that was gutted when hedge funds fled Bear. By the end of last year, JPMorgan says it had lured back many clients and gained new business.

“We had a tremendous amount of new business come in as a result of the flight to quality.” said Louis Lebedin, JPMorgan’s co-head of prime brokerage. “In terms of exposure to the top 100, the $1 billion-plus funds, we’ve tripled our share to the highest it’s ever been.”

Now that most fund managers maintain accounts with two or three prime brokers, partly as a result of last year’s collapses, Lebedin said JPMorgan is promoting iSophis, a technology that lets fund managers monitor positions across the various brokers. The big bank also is expanding into Europe and Asia, markets where Bear had little presence.

Another winner of the financial crisis, Credit Suisse, has cautiously added assets from about 70 fund firms, giving it 470 clients, global prime services head Philip Vasan said.

“The lion’s share of the business we took in came from existing clients, clients who knew us and felt we had maintained a steady hand,” he said. 

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It is the most prestigious job that nobody wants.

Bank of America is searching for a new chief executive, and by all accounts, it is having a tough time finding someone for the job.

Heading up Bank of America, an appealing task in better times, has become unpalatable to potential candidates from outside the bank amid a bevy of operational, regulatory and political challenges.

“This job doesn’t have all the advantages it would normally have,” said Anthony Polini, an analyst with Raymond James Financial Services.

The bank is struggling to staunch real estate and consumer credit losses, while simultaneously integrating two large businesses– mortgage lender Countrywide Financial and brokerage Merrill Lynch & Co.

On top of that, government regulators are bearing down hard on Bank of America, issuing a secret regulatory oversight agreement, overhauling the company’s board and mandating pay cuts for some top employees. The bank needs to not only maximize shareholder profit, it must also placate regulators and politicians.

As a result, high profile external candidates linked with the job — like Bank of New York Mellon’s CEO Bob Kelly and BlackRock CEO Laurence Fink — have either declined the post, or denied any interest in the position to begin with easy payday loans.

“Who wants this headache right now? Nobody,” said Paul Miller, a bank analyst with FBR Capital Markets.

Some internal candidates are still expressing interest. Brian Moynihan, head of the bank’s consumer unit, told Reuters on November 4 he would take the top job if offered it.

“Anybody would want this job, it’s one of the best jobs in the business,” he said before a speaking engagement in Los Angeles.

A CNBC report on Monday said Moynihan and Greg Curl, Chief Risk Officer, were two finalists for the position, and the board was divided on them.

Although some investors would like to see the bank pick a CEO as soon as possible, others recognize that the process will take time.

“A 90-120 day period would not be unusual in a search like this,” said Dan Genter, CEO of RNC Genter Capital, which owns 400,000 shares. “There’s a significant amount of searching and its very difficult to find a candidate for this job.”

The bank has until the end of the year to replace outgoing chief Kenneth Lewis, scheduled to retire on December 31.

CREDIT LOSSES 

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The dollar’s edge as the world’s leading reserve currency will be chipped away only slowly, and it is likely to remain dominant for many years, a Reuters poll of foreign exchange strategists showed.

The dollar makes up an estimated 63 percent of central banks’ global exchange reserves at present. The ratio has been falling gradually from above 70 percent in 1999, when the euro was introduced.

The Reuters poll of 34 strategists shows them giving a median forecast for the dollar to make up 60 percent of reserves five years from now, 55 percent in ten years, and 48 percent after 20 years.

That is in line with a Reuters poll in April which saw the dollar making up around 55 percent of reserves in 2020.

Some central banks have been putting a larger fraction of incoming reserves into currencies other than the dollar partly because of concern about the dollar’s long-term stability. China has suggested that the dollar eventually be replaced as the main currency for global reserves.

But the unmatched depth and liquidity of U.S. financial markets means the shift away from the dollar will remain very slow, strategists in the poll said.

“It will take decades for another capital market to be built as deep as is currently available in the U.S. Accordingly, this is a slow trend that will play out over many years,” said Camilla Sutton at Scotia Capital.

YUAN

The survey also suggested that despite China’s growing economic power, the yuan is still a long way from becoming a major reserve currency.

Of 35 strategists who discussed the yuan, 15 said the yuan would not reach this status for five to ten years, while 13 said it would take more than ten years.

Two predicted the yuan would become a reserve currency in just two years, while five estimated between two and five years.

Central banks appear unlikely to embrace the yuan unless China eases capital controls and makes its currency more freely tradable.

“China still has to deliver another revaluation of about 2 to 3 percent and extend the period of yuan-based payments with its trading partners before easing FX controls,” said Ashraf Laidi at CMC Markets.

(Polling by Bangalore Polling Unit; Editing by Victoria Main)

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U.S. budget deficits will continue to pile up in the next decade, eventually reaching an unsustainable level that may result in an economic collapse, according to Richard Duncan, author of “The Dollar Crisis.”

The U.S. has little chance of resolving its deteriorating financial position because the manufacturing industry continues to shrink, leaving the nation with few goods to export, said Duncan, now at Singapore-based Blackhorse Asset Management.

In “The Dollar Crisis,” first published in 2003, Duncan argued that persistent current account deficits by the U.S. were creating an unsustainable boom in global credit that was destined to break down, resulting in a worldwide recession.

“The bad news is at the end of a 10-year period we’re still not going to have fixed the problem,” Duncan said in an interview in Hong Kong yesterday. “Eventually it will lead to high rates of inflation well down the line and really destabilize things to the point where there may be irreparable damage. A kind of ‘Fall of Rome’ scenario.”

The federal budget deficit will total $1.6 trillion this year, while combined shortfalls are forecast to total $9.05 trillion in the next 10 years, according to projections from the nonpartisan Congressional Budget Office.

The U.S. has run a current account deficit every year since 1982 except one, with a peak of $788 billion in 2006. Foreign purchases of U.S. debt has propped up the dollar and allowed a credit-fueled spending boom by the nation’s consumers, according to Duncan.

Falling Wages

U.S. workers are now likely to face declining wages and that may create a political backlash against free-trade policies, he said. The nation’s jobless rate jumped to a 26-year high of 9.7 percent in August, while wages logged a 2.6 percent increase from the previous year.

“As unemployment remains above 10 percent well into the foreseeable future, it won’t be long before Americans start voting for protectionism,” Duncan said. “That’s going to be bad because protectionism will mean world trade will diminish and will overall reduce global prosperity.”

Once the U.S. debt burden becomes too large and the government can no longer sell debt to the public the Federal Reserve will likely step in and monetize it, resulting in high levels of inflation, he said.

Economic Crisis

The MSCI World Index plunged by a record 42 percent last year as the collapse of Lehman Brothers Holdings Inc. triggered a credit crunch that forced financial institutions to post more than $1.6 trillion in losses and writedowns.

As an analyst, Duncan began warning of imbalances in Thailand’s economy in 1993 that eventually led to the devaluation of the baht in 1997 and a regional economic crisis. The nation’s SET Index dropped as much as 88 percent from its 1994 peak to a low in 1998.

Prior to joining Blackhorse, Duncan was the head of investment strategy at ABN Amro Asset Management. He has also held positions at James Capel, Indosuez W.I. Carr and Salomon Brothers.

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U.S. stocks are poised to repeat their advance this week as investors bet that the economic recovery is gaining strength and company outlooks are turning rosier.

Despite the anniversary this week of Lehman Brothers Holdings’ collapse and the tumult that subsequently rocked Wall Street, the mood in the market is likely to be more optimistic than gloomy.

A year ago, it seemed as if the financial world was coming to an end when Lehman, a 158-year-old trading company and parent of what had been the fourth-largest U.S. investment bank, filed for bankruptcy on September 15, setting off a scramble by authorities to avert global financial meltdown.

But fast forward to September 2009, U.S. stocks are at new 11-month highs, and if this week’s economic reports show that the recession continues to abate, U.S. stocks should extend their run-up.

“The market is still in the process of pricing in an economic recovery,” said Sean Clark, chief investment officer at Philadelphia-based Clark Capital Management.

“We think we’re going to see 3.0 percent economic growth in the second half of this year. As we look out into the future, I think third-quarter earnings are going to be better than expected and, based on improving economic conditions, we’ll start seeing top-line growth.”

OUTLOOKS, DATA

Indeed, in recent days there have been increasing signs that corporate profits are improving after FedEx Corp and Procter & Gamble joined other bellwethers in giving upbeat financial outlooks last week.

There could yet be more companies this week that offer welcome news in their outlooks cheap credit report.

“The earnings pre-announcements are going to be important because to sustain any move beyond where we are, we have to have pretty decent earnings growth in 2010,” said Gail Dudack, chief investment strategist at Dudack Research Group in New York.

On the economic front, August retail sales, due on Tuesday, along with the Producer Price Index and a reading on July business inventories, will command attention. Data on New York state manufacturing is also due on Tuesday.

A Reuters poll of economists expects retail sales to show a gain of 2.0 percent after a slide of 0.1 percent in July. Excluding autos, the sales are projected to be up 0.4 percent, compared with a dip of 0.6 percent the prior month.

“You will get a boost to retail sales from the autos side, but we will be looking at the underlying trend of sales without autos,” said John Praveen, chief investment strategist at Prudential International Investments Advisers LLC in Newark, New Jersey. “If there’s any improvement, that should give a gauge of recovery in consumer spending.”

Data on the Consumer Price Index and industrial production in August are due on Wednesday.

Releases on August housing starts, a weekly report on initial jobless claims and a survey of factory activity in the U.S. mid-Atlantic region are scheduled on Thursday. 

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Gold rose to the highest price since March 2008, topping $1,000 an ounce, while silver climbed to a 13-month high as a weaker dollar and concern that inflation may accelerate boosted the appeal of precious metals.

Bullion surged as high as $1,009.70 in New York, within 3 percent of the record of $1,033.90 set in March 2008. The metal is headed for a ninth annual gain. Crude oil and all six industrial metals on the London Metal Exchange rallied as the U.S. Dollar Index fell as much as 1.2 percent to an 11-month low. Raw materials typically rise when the greenback falls. Equity indexes climbed from Tokyo to London and New York.

“The market thinks inflation is coming,” Leonard Kaplan, the president of Prospector Asset Management in Evanston, Illinois, said by telephone. He has been trading gold for more than 30 years and believes gold won’t stay above $1,000 for long. “With interest rates so low, money is chasing money and the dollar is getting murdered.”

Governments have cut interest rates and boosted spending to fight the worst recession since World War II, spurring investors to buy bullion as a hedge against the prospect of accelerating inflation and currency debasement. Gold, silver and palladium holdings in exchange-traded funds have reached records.

Gold previously traded at more than $1,000 on Feb. 20, the first time the metal had surpassed that price since March 2008. Futures dropped as low as $865 on April 6. The metal advanced $3.10, or 0.3 percent, to $999.80 an ounce on the New York Mercantile Exchange’s Comex division. In London, bullion for immediate delivery surged as high as $1,007.70 and traded at $995.75 at 8:25 p.m. local time.

Selling May Ensue

“We are at levels similar to February and June this year, which triggered profit-taking, sending gold prices lower,” Anne-Laure Tremblay, a BNP Paribas SA analyst in London, said by e-mail. She cited “little in the way of inflationary pressures” as well as an appetite for riskier assets.

“This week I will be looking for consistent and steady trade above $1,000 before considering a long position in gold,” Ralph Preston, a Heritage West Futures Inc. analyst in San Diego, said by e-mail. “I’m looking for $1,200 gold before year’s end. I believe the Iranian deadline to negotiate with the West will have an impact on gold and oil moving into the final quarter of this year.”

Iran may offer to resume talks over the Persian Gulf country’s nuclear program, Agence France-Presse reported, citing comments by Foreign Minister Manouchehr Mottaki on the state-run ISNA news service. World powers have set an informal end-of- September deadline for Iran to respond on its atomic-power work.

$1,200 ‘Possible’

Gold may set a record within five sessions and “it’s possible” that it will touch $1,200 within weeks, Prospector’s Kaplan said. “And if a new record doesn’t come soon, it doesn’t come in the near future,” Kaplan said. “Markets think that the Fed isn’t going to withdraw stimulus money fast enough and that would cause inflation.”

Gold may be cementing its haven-investment status as governments flood the financial system with cash to haul the global economy out of a recession. The dollar index has dropped for three straight sessions, touching 77.047, the lowest since Sept. 29. The gauge has slipped 4.9 percent this year.

“We don’t see any immediate recovery in the dollar and gold is one of the better alternatives,” said Bernard Sin, the head of currency and metals trading at bullion refiner MKS Finance SA in Geneva. “From here, the next technical level is $1,040, and at the rate it’s going, it might not be difficult. There’s a lot of new money coming into gold quick payday loan.”

Decline by Year-End

Gold prices may reach a short-term peak of $1,050 and retreat to the “mid-$700s” by year-end, said Miguel Perez- Santalla, a Heraeus Precious Metals Management sales vice president in New York. “I am a bear” on gold, he said.

““Even though the U.S. dollar continues to be weak against the euro, gold is considered overall by the market to be overdone at the higher price level,” Perez-Santalla said. “I won’t put my money into gold, and I know many traders and their families that are rummaging their jewelry looking for scrap to sell to take advantage of these high prices.”

The metal’s advance boosted producers. Newcrest Mining Ltd., Australia’s largest gold-mining company, gained 3.7 percent to A$33.75 in Sydney. Zijin Mining Group Co., China’s biggest supplier, rose as much as 10 percent in Hong Kong.

“Gold can push much higher, especially if confidence in the dollar continues to recede,” Edward Meir, an MF Global Ltd. analyst in Darien, Connecticut, said today by e-mail. “In fact, adjusted for inflation going back to 1980, values should be around $2,500 an ounce.”

In London, lead, which has more than doubled this year to pace gains in metals, jumped 4.5 percent. Copper, which has doubled this year, rose 2.4 percent to a one-week high.

Other Precious Metals

Other precious metals have outperformed gold this year.

Silver futures for December delivery advanced 22.5 cents, or 1.4 percent, to $16.51 an ounce on the Comex, after touching $16.86, the highest for a most-active contract since Aug. 5, 2008. The metal has climbed 46 percent this year.

Palladium futures for December delivery rose $2.60, or 0.9 percent, to $298.60 an ounce and touched $301 earlier, a one-year high. The best-performing precious metal this year has gained 58 percent in 2009. Platinum futures for October delivery jumped $30.50, or 2.4 percent, to $1,289.60 an ounce in New York, increasing its gain for the year to 37 percent.

Investing in gold “is a hedge against policy makers losing control of fiscal and quantitative monetary policies,” said Greg Gibbs, a Royal Bank of Scotland Group Plc strategist in Sydney.

U.S. President Barack Obama has increased the nation’s marketable debt to an unprecedented $6.78 trillion as he borrows to spur the world’s largest economy. Goldman Sachs Group Inc. predicts that the U.S. will sell about $2.9 trillion of debt in the two years ending September 2010.

Oil Climbs

Crude-oil futures, used by some investors to forecast inflation, surged as much as 5.5 percent today and have soared 59 percent this year in New York. Consumer prices will rise 0.9 percent in advanced economies in 2010 compared with 0.1 percent gain this year, the International Monetary Fund said in July.

Gold’s eight-year advance, the longest in six decades, may attract more investors. Assets in some of the industry’s largest exchange-traded funds have set records in the past few months.

The SPDR Gold Trust, the biggest ETF backed by the metal, reached an all-time high of 1,134.03 metric tons on June 1. The fund, which held 1,077.63 tons as of Sept. 4, has overtaken Switzerland as the world’s sixth-largest gold holding. Bullion held in ETF Securities Ltd.’s exchange-traded products gained 6,640 ounces to a record 8 million ounces (248.8 tons) yesterday, its Web site showed.

The company’s silver holdings increased 0.9 percent to an all-time high of 20.516 million ounces, while palladium assets rose 1 percent to a record 456,953 ounces.

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Seniors battered by the tough economy are selling their life insurance policies to replenish their retirement nest eggs.

Unlike younger investors, older adults may not have time to wait for the market to recover their losses, so they’re turning to this previously overlooked asset to see whether they should sell it and use the money to pay medical bills or other expenses.

Seniors sold life insurance policies with a face value of $11.8 billion last year, almost double the value of policies sold just two years earlier, according to the U.S. Senate’s committee on aging, which recently held a hearing on such transactions.

A "life settlement," as a sale is called, may be an attractive option for seniors who determine they no longer need their life insurance policy, said Doug Head, executive director of the Life Insurance Settlement Association, an industry group.

Policyholders typically sell their insurance through life settlement brokers to investment companies for lump sums that are usually several times greater than they would receive if they surrendered the policies to the insurance companies, he said.

The new owners pay the remaining premiums and become the beneficiaries when the original policyholders die.

But a life settlement doesn’t always make sense, experts caution, and seniors considering such a sale should consult with an independent financial adviser to figure out whether it’s the best move.

"If you’re thinking about selling your life insurance mostly because you’re strapped for cash, there may be other ways to tap the value of your policy without losing your coverage," said lawyer and insurance expert David McDowell.

"You may be able to take out a loan against your policy or receive a partial payout through an accelerated death benefit," he said. "It’s worth visiting with your life insurance agent and exploring the option."

"The best candidates for a life settlement are now people in their 70s or older who have a life insurance policy valued at $500,000 or more that they no longer need, perhaps because their spouses have passed away," said Scott Gibson of Lewis and Ellis, an actuarial consulting firm cash advance.

Though the amount that seniors receive for their life insurance will vary depending on their age, gender and health, the average payout today is slightly less than 20 percent of the policy’s death benefit, said Russel Dorsett, co-managing director of the Select Life Settlement Corp. in Houston.

"That’s still three or four times more than they’d get if they simply surrendered their policies to the insurer," he said.

Still, selling a life insurance policy is often a complex transaction involving time and paperwork, so consumers should turn to financial advisers who know the risks, said Ana Smith-Daley, a deputy insurance commissioner for Texas.

"An independent adviser can help you decide whether selling your policy is in your best interest," she said. "If it is, the adviser will probably call on a broker to shop around your policy to determine what kind of price it will fetch."

Seniors also need to understand that their medical records will be examined as part of the sales and that the buyers of their policies will occasionally check on them to determine when to collect the death benefits, she said.

Smith-Daley said sellers may also pay taxes on the proceeds from a life settlement and lose their eligibility for Medicaid or other government benefits, so anyone contemplating a sale should consult a tax adviser or lawyer.

But even with those considerations, industry officials expect life settlements to exceed $100 billion over the next couple of decades as boomers convert unwanted or unneeded life insurance to cash to bolster their lagging savings.

"Under the right circumstances, it’s a viable and valuable option that will only become more popular," Gibson said.

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The International Monetary Fund plans to adjust its global growth forecast to “just below” 3 percent for 2010, a senior economist at the lender said, higher than its prediction in July.

The projections haven’t been finalized, Jorg Decressin, a division chief in the IMF research department, said on a panel at the Carnegie Endowment for International Peace in Washington today. In July the IMF predicted the world economy would expand 2.5 percent in 2010 after contracting 1.4 percent this year. The new forecasts will be released Oct. 1.

“The main risk is that people mistake the recovery we are seeing right now for a self-sustained recovery and withdraw the policy support prematurely,” Decressin said, adding that he still sees risks “on the downside.”

Since the July forecast, data has shown growth returning to the economies of Japan, France and Germany and the Commerce Department reported last week that the U.S. economy shrank less than estimated in the second quarter.

“What needs to happen for this recovery to become self-sustaining is that private demand needs to step in for public demand,” Decressin said.

It will also require a global rebalancing, with an increase in domestic demand from countries with a current- account surplus, he said.

Because it will take time to rebuild activity, the recovery will be “sluggish,” he said.

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Europe’s unemployment rate rose to the highest in more than 10 years in July as companies cut jobs to weather the worst recession in six decades.

Unemployment in the 16-member euro region increased to 9.5 percent from 9.4 percent in June, the European Union statistics office in Luxembourg said today. That was the highest since June 1999 and in line with the median forecast of 28 economists in a Bloomberg survey.

Europe’s economy may struggle to gather strength as some of its largest companies including Siemens AG eliminate jobs to shore up earnings. European Central Bank President Jean-Claude Trichet said last month that rising unemployment may erode consumer spending. Economic confidence rose for a fifth month in August, adding to signs the recession has bottomed out.

“We expect European unemployment to rise further over the coming months, reaching a peak of 11.5 percent around early 2011,” said Sylvain Broyer, chief euro-region economist at Natixis in Frankfurt. “We might only see modest economic growth followed by another phase of contraction next year.”

The euro-area economy may shrink about 4.6 percent this year and around 0.3 percent in 2010, the ECB forecasts. The central bank has injected billions of euros into markets and trimmed borrowing costs to a record low of 1 percent to encourage lending and bolster the economy. The ECB will release its latest economic forecasts on Sept. 3 when council members meet in Frankfurt.

‘Very Cautious’

“We will have to accept that unemployment will have to augment, maybe significantly, and that will have a bearing on the evolution of growth,” Trichet said last month. “We have to remain ourselves very cautious and also very prudent.”

Munich-based Siemens, Europe’s largest engineer, said on July 22 that it plans to cut 1,400 more jobs in order to meet profit targets. Paris-based Air France-KLM Group, the region’s largest airline, is cutting 3,000 positions and putting workers on temporary leave paydayloans.

Fighting unemployment must be “a priority,” ECB council member Ewald Nowotny said yesterday in Alpbach, Austria. While downplaying worries of a “W-shaped recession,” Nowotny said: “What I see is the danger that we’ll have very low rates of positive growth for some time.”

European consumers are reining in spending. Retail sales in the region fell for a 15th straight month in August, the Bloomberg purchasing managers index showed on Aug. 27. Retailers also stepped up job cuts last month as profit margins remained under “severe downward pressure,” the report showed.

Cutting Prices

Carrefour SA, Europe’s largest retailer, on Aug. 28 reported a first-half loss after cutting prices to encourage shoppers. Chief Financial Officer Pierre Bouchut said that day there was “no sign of either improvement or deterioration” and called the situation “difficult.”

European stocks declined as raw-material producers and banks fell. The Dow Jones Stoxx 600 Index was down 1.1 percent at 233.52 at 9:50 a.m. in London. The euro traded at $1.4341 against the dollar, up 0.1 percent on the day.

In Germany, Europe’s largest economy, the number of people out of work unexpectedly declined in August after the government introduced stimulus programs and subsidies to encourage companies to keep workers on payrolls. Total unemployment fell 1,000 to 3.46 million, the Federal Labor Agency said today.

The German unemployment rate remained at 7.7 percent in July, the EU statistics office said. Spanish unemployment rose to 18.5 percent, the highest in the 27-nation EU, while the jobless rate in Ireland increased to 12.5 percent.

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Colombia’s central bank will probably keep its benchmark rate unchanged today after seven straight reductions as inflation slows and the economy shows signs of a recovery.

The seven-member board, led by bank chief Jose Dario Uribe, will maintain the interbank rate at 4.5 percent, according to 20 of 22 economists surveyed by Bloomberg. Two analysts forecast a half-point cut.

“We’re starting to see the impact of lower interest rates,” said German Verdugo, head analyst at Bogota-based brokerage Correval SA. “If they lowered the rate more, they would be risking too much inflation. We’re seeing recovery in consumer and corporate confidence.”

Colombia’s economy will probably shrink for a third consecutive quarter in the three months through June, Uribe said July 10, the longest contraction since 1999, before resuming its expansion. Policy makers have room to pause for the “near future,” the bank chief said last month.

Consumer prices fell in June for the first time since September, putting the annual inflation rate at 3.8 percent, below the bank’s 4.5 percent-to-5.5 percent target, and less than half the 7.9 percent pace reached in October 2008.

“Lower rates could promote additional growth, but this is a pretty potent stimulus at 4.5 percent, and they need to be in a position to cap inflation when the economy rebounds,” said David Duarte, a Latin America analyst at 4Cast Inc. in New York.

Economic Outlook

The government maintained its official economic growth forecast for 2009 at 0.5 percent to 1.5 percent even after the economy entered recession with a 0.6 percent contraction in the first quarter compared with the same quarter a year earlier.

Policy makers last year pushed borrowing costs up to a seven-year high, leading to lower consumer lending, industrial output and retail sales. Before beginning to cut rates in December, the bank’s seven-member board increased them 16 times over 2 1/2 years to curb inflation.

Retail sales fell 3.5 percent in May from a year earlier, while industrial output declined 6.5 percent in May from a year earlier, the national statistics agency said last week.

Uribe and Finance Minister Oscar Ivan Zuluaga have said the country isn’t in a recession since Colombia’s gross domestic product expanded 0 best life insurance company.2 percent in the first quarter of 2009 compared with the fourth quarter of 2008.

Second-Half Rebound

The bank chief has said policy makers expect the economy to revive in the second half of 2009 and end the year with slightly positive growth. The government estimates 2010 gross domestic product growth of 2.5 percent, Zuluaga said June 16.

In announcing the board’s decision to trim the overnight rate to the lowest in at least a decade on June 19, Uribe told reporters that “we don’t expect changes to the benchmark rate in the near future.”

Policy makers at last month’s meeting agreed that “with the data at hand, no further changes in that rate are anticipated in the near future,” according to the minutes posted on the central bank’s Web site.

The bank board may also prefer to hold the rate at 4.5 percent through year-end rather than ease further in 2009 only to be forced to raise borrowing costs in 2010, a presidential election year, said Alberto Bernal, head of emerging markets research at Bulltick Securities Corp.

“Economic activity has touched bottom and headline inflation is falling much faster than core inflation,” Bernal said. “Also, 2010 is an election year so the central bank will likely try to avoid having to raise rates.”

Prioritizing Inflation

Zuluaga, who is also president of the bank’s board, hopes as much as 55 trillion pesos ($27.9 billion) of infrastructure spending this year will also provide a boost to the economy and create as many as 800,000 jobs.

Colombia expects a budget deficit next year equivalent to 3.4 percent of gross domestic product compared with a forecast shortfall this year of 2.4 percent, Zuluaga said in June.

The current account had a deficit of $976 million in the first quarter of 2009, according to the central bank.

“Since Colombia is running twin deficits, current account and fiscal, they need to keep rates here to ensure funds keep flowing in,” Duarte said.

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