Weekend's Business Holiday: Bored with Bali? Try Lombok, Indonesia

Been to Bali too often? Bored with the hustlers, the traffic and the super-chic mafia? Just a strait away or accessible direct from Jakarta or Surabaya is Lombok, much quieter and with much of the same charm and arguably even richer ecology than its more famous neighbor.

I confess I'm one who has decided enough is enough with Bali. I haven't been there for years, much as I used to enjoy wandering the shops in Kuta, the ambience of Kudeta and the jet set feel of Seminyak.

Former Tourism and Culture Minister Joop Ave used to brag that "we've got Bali and much more." Lombok was one of the places he was talking about. The western coast shares the culture of Bali, is physically beautiful and certainly has no shortage of attractive places to stay.

Lombok doesn't have anywhere near the variety, but for the traveler who prefers the quiet life at least some of the time this is no obstacle. As we all know, you can make fun anywhere in the world with the right friends.

Lombok was always planned to take the overflow from Bali. In fact, little has moved on the island for the past 10 years. The tourist millions failed to eventuate, at least not in the numbers that the hoteliers hoped for, and Lombok's tourist industry suffered particularly badly after the terrorist bombing accross the water in 2002.

On the plus side, that means no traffic jams and a trip from the airport to the Senggigi beach strip will take a relaxed half hour.

A new international airport is planned that is likely to extend that journey, but in general getting around Lombok is a lot less trouble-free than braving the Bali roads.

One change that has occured in Lombok is the success of the trio of Gili backpacker islands (the word gili actually means island): Gili Trawangan, Gili Airand and Gili Meno). Easily accessible from main centers on Lombok, they are a charming throwback to past leisure that has caught off with the budget set.

The island is effectively divided down an ethnic divide. The west, including Senggigi, is populated by people of Balinese descent, who are Hindu, while the rest of the island is Muslim, dominated by the Sasak ethnic group.

While the styles of the two ethnic grops are dramatically different, everyone gets on well together. Intermarriage is common and for most people on Lombok mixing beliefs is nothing to be concerned about.

"Both the husband and the wife are welcome to follow their own religions and the children are brought up understanding both, then they can choose which religion they want to adopt when they are old enough," says one local.

But, he admits, the tolerance is starting to erode a little in line with the polarization of religions elsewhere in the country, and some families are starting to object to inter-marriage.

Others prefer to have a foot in each camp, officially subscribing to Islam but also practicing Hindu and animist rituals. To complicate the religious map, there is a community of pribumi Buddhists at Pemenang in the north of the island, a leftover from earlier days.

There is no shortage of history. Some proud Lombok people remember the days of Karangasem empire in the 19th century, which rules as far as East Java. The peak of that empire came when the ruler lived in Lombok, not aross the strait in Bali.

Reveling in dramatic mountain-meets-beach scenery, a touch of history and a rich natural environment, with a particularly rich maritime environment (despite the bomb fishing), the island is not in any way short on creature comforts.

Lombok's priciest hotel is without a doubt the Oberoi, tucked away on the northwest coast. Described on the hotel's website as "a hideaway with acres of tropical gardens, shimmering ocean and golden sands along a private beach," it does have - like the Oberoi chain in general - a reputation for doing things well.

Nor is it cheap. A luxury villa with garden view - for some reason more expensive than the ocean view - will set you back $709 in the high season, but you do get your own pool if you don't like slumming in the main pool.

For some, that's affordable. In June, Peer Lausen of Denmark spent time there. "Great hotel, a bit isolated so don't expect a lot activities outside the resort but the resort has everything one would need so there are no need to go ouside," he recalls. "Perfect place for a honeymoon."

Yachties' choice

The Oberoi has its supporters for other reasons than the accommodation. The yacht set says it has the only real facility for mooring. Your own boat is of course the perfect vehicle to check out the smaller islands that ring Lombok. The best known is Gili Trawangan, but there are other less discovered gems.

Nor do you have to be a millionaire to enjoy Lombok. On my most recent visit, I stayed at the Sheraton, which was offering a resident's rate of Rp 875,000++ for a hotel that's difficult to fault, even if it's not as ritzy as the Oberoi. No cotton buds in the bathroom? Well, you can't have everything.

The Gills are even more affordable and offer something of a flashback to the hippie era with signs for "magic mushrooms" all over the islands. And there's luxury even there if you can't stand the homestays.

The Lombok Hotel on Gili Air may not be as flash as the Oberoi, but it comes at the much cheaper price of $82++ for a double in its most luxurious rooms, with standard, fan-cooled rooms a mere $47.

It's worth noting that, unless bank account is bottomless, it's better to drink outside the hotel. While food prices at the Sheraton were reasonable, an evening meal with two old friends reached top-end Jakarta prices. A check of the tab revealed that four cans of Heineken beer were to blame, at Rp 60,000 each.

Tourist traps

Unless you've made the decision to spend all that hard-earned cash at the Oberoi and have settled for Senggigi or the Gilis, it's no effort to get out of the hotel. At senggigi, I preferred breakfast at the delightful Kafe Taman, where a better, freshly cooked breakfast cost me a third of the price of the buffet back at the hotel.

Senggigi's bars also keep rocking well into the night with live bands competing with each other to drag in the clientele.

Tourist traps apart, Lombok boasts some remarkable natural and cultural experiences. Mt. Rinjani is likely to be listed as a world heritage site next year, but climbing it is not for the faint of heart.

A trip to the peak involves some mountain climbing experience and will take three days of muscle-wrenching pain from your life.

The south of Lombok - also boasting a Kuta beach - is far hotter than the west coast but boasts good surfing. There are some remarkable villages featuring Lombok's distinctive ethnic architecture on the way to the south, but the inhabitants tend to expect hand-outs at every inch of the way.

The strangely named Bouldercity is another popular destination and is one of the most famous diving sites in Indonesia.

Poor community

There is a downside to Lombok, with a degree of visible desperation of some hovering on the edge of poverty.

As in Bali, there's no shortage of offers of 'transport, transport' and grabbing the first vehicle that comes along can produce a story of woe.

One driver who took me from my breakfast spot back to the hotel said it was his first fare in three days. "I've got five children to support," he lamented.

The failure of the tourism industry to take off has dashed some hopes of a better economic future, and visitors can expect to be hassled every now and then by vendors of necklaces (the pearls are cheap if not high quality), sarongs and so on.

Still, Lombok people don't blame you for the economic misfortune personally and are happy to see that some tourists still do come.

Sitting on the beach with a cool drink watching the sun set over Mt. Agung across the Lombok Strait on Bali, you can even reflect that you're lending a helping hand.

Getting to Lombok

For international travelers, getting to Lombok usually requires a transit in Denpasar, Bali. A Merpati Nusantara shuttle flies between the two islands but the service is often fully booked. Ferries, from either Benoa or Padang Bai, are an alternative, with a maximum four-hour voyage and then another hour by road from the port at Lombok.

From Jakarta, a number of direct flights operate daily with Garuda Indonesia and Lion Air.

Weekend's Featured: Stagflation In The US, Anyone?

Suddenly U.S. stagflation doesn't seem so far fetched anymore.

The Federal Reserve's rate cut last week has been interpreted by the markets - bond yields up, equity and commodity prices up - as being reflationary. But the dollar's coincident fall suggests further rate cuts as the Fed tries and fails to stave off economic downturn. A word of caution here, however. Break even inflation rates suggest that although the market is discounting a slightly higher inflation rate in the future, the operative word is "slightly" here. Inflation here is seen at only around 2.3%. And although the dollar (and a multitude of economists' forecasts) suggest slower economic growth, the market consensus is far from calling recession. Indeed, the economy is broadly expected to bottom out in the region of 2% year on year GDP growth. So why worry about stagflation? After all these sort of numbers suggest, at the very worst, stagflation-lite. The reason to worry is that the market seems a bit too complacent. The balance of risks is towards higher inflation and slower growth. Greg Jensen and Fred Post at Bridgewater Associates, a large asset management firm, paint the picture in a recent research note. Both rising inflation and falling growth are features of the end of a reserve currency's dominance, they argue. The flows of cheap capital slow and ultimately the central bank has to recourse to printing money to pay debts. That, arguably, is the dollar's position. Ever more countries are looking to cut their reserve weightings in the dollar as their pegs against the weakening U.S. currency force up domestic inflation. Saudi Arabia is just the latest in a growing list. That just points to further dollar weakness and rising imported inflation into the U.S. (crude prices north of $80, rising Chinese import prices, rising commodity prices etc.) But investors are still largely wedded to the notion that inflation is dead - thanks to its steady decline during the past 25 years or so. As inflation starts to pick up, they'll be in for a nasty shock. What's more, this dollar depreciation is unlikely to spur the economy into revival as long as the U.S. housing market keeps collapsing. Robert Shiller, the Yale professor and housing expert, figures that there's still a very long way to run in this downturn. What's more, recent research suggests that housing market weakness is a more significant cause of recessions than shifts in business investment. Which is to say rising inflation will be met by slowing growth. Stagflation, in other words.

Eurozone's September Inflation Rate Surges Above Target

The annual rate of consumer-price inflation in the euro zone surged in September, rising above the European Central Bank's 2% target for the first time in more than a year.

The annual rate of inflation across the euro zone was 2.1% in September, a preliminary estimate released by the European Union's official statistics agency Eurostat showed Friday. That means it has risen above the ECB's target of "below, but close to, 2%" for the first time since August 2006. The jump was expected by economists, who last week had forecast that energy-related base effects and rising food prices would push the rate of inflation higher. While a component breakdown isn't yet available, economists said it was likely that high oil prices were the main cause for the jump. But the rise is still likely to create a headache for the European Central Bank, which sets the interest rate in the 13 countries that share the euro. The bank had been on a tightening bias, repeatedly signaling that it thinks the risks to inflationary pressures are on the upside. However, recent turmoil in the financial markets caused havoc in the money markets and prompted the bank to leave its key interest rate on hold at 4.00% at its September policy meeting as it waits to assess the impact that the credit crunch has had on the real economy. And recent data have been mixed, which will make the decision all the more difficult. A range of measures of consumer and business confidence across the region have fallen, suggesting that the credit crunch is having an impact on the real economy. But other indicators, including Friday's inflation data, have remained buoyant, suggesting that the euro zone remained strong in the third quarter. Economists are divided over what the ECB's next move will be, with some saying a rate hike is on the back burner for the time being, while others think the ECB's Governing Council is minded to increase the key rate once more before the year end - to 4.25% from 4.00%. And the inflation data will give those in favor of a rise some ammunition. Germany, the euro zone's largest economy, reported a sharper than expected increase in its inflation rate Thursday, with the annual measure surging to 2.7% from 2.0%, the highest rate in nearly six years. "Signs of mounting inflationary pressures in the euro zone's largest economy will have done nothing to ease the ECB's fears regarding price stability," said Jennifer McKeown, an economist at London-based Capital Economics. "As such, we still think that there's a good chance of another rate hike, perhaps in November." Spanish inflation also spiked in September, accelerating to an annual rate of 2.7% from 2.2% in August, preliminary data from the National Statistics Institute showed Friday. Eurostat didn't give a breakdown of how prices changed over the month, but noted that the full breakdown of the September Consumer Price Index would be published Oct. 16. This is likely to be closely watched as it will give a clearer picture of what has caused the measure to surge this month.

China Bank Ups Mortgage Interest Rates

China's Central Bank Ups Mortgage Interest Rates, Downpayment for 2nd Residential Loans.

China has raised mortgage interest rates and increased the down payment needed for loans to finance purchases of second homes, the central bank said in a notice seen Friday.

The moves were widely expected due to official concerns over surging property prices.

The mortgage lending rate for both commercial purchases and for second residential properties is being raised to 1.1 times benchmark lending rates. China's benchmark one-year lending rate is now 7.29 percent, so the new rate would be 8.019 percent.

Buyers of second residential properties are required to make minimum down payments of 40 percent, up from the previous 30 percent, according to the notice posted on the Web site of the People's Bank of China.

Mortgages for commercial properties will require a 50 percent down payment and can be for a maximum of 10 years, the notice said.

The rules were part of a package of restrictions announced by the central bank and the China Banking Regulatory Commission aimed at discouraging the property speculation that is helping to drive prices higher.

The two agencies vowed to "strictly" tighten control over land use and lending for property development.

"It is clear that the rapid rise in real estate prices is due to irrational factors and that market risks for commercial lenders are increasing," the central bank said in a "question and answer" notice on its Web site.

The new regulations were aimed at "reducing lending risks and ensuring the healthy development of the real estate and capital markets," it said.

China Remains A Favourite Among Fund Managers

The insulation of China's stock markets from the global financial turmoil has kept the country's equities popular among international fund managers despite recent price gains, according to Dow Jones Newswires' monthly poll of managers active in Asia.

Driven by domestic investors with massive savings, a seemingly insatiable appetite for stocks, and government imposed limits on asset flows, China's bourses have far outpaced other global equity markets and remained protected from credit market trouble that weighed on stocks elsewhere. The Shanghai Composite is up 20% since the end of July. And though managers anticipate some turbulence ahead - including a period of underperformance by Chinese shares as other markets race to catch up - many think that the long term outperformance of Chinese stocks is set to continue. That's partly because few expect Chinese authorities to take major steps to cool stock price gains. "With liquidity conditions strong and the authorities unlikely to want to cause a major reversal, only targeted and incremental measures are likely," wrote Nicholas Brooks of Henderson Global Investors, in response to the survey. Managers also favor India, though they remain cautious about the impact of foreign capital flows and a slowing of economic growth. Still, India is seen as somewhat insulated from an economic slowdown in the U.S. thanks to its relatively small export sector. "Despite our short-term cautious view and expectation of a volatile market, we remain positive on a medium to longer term perspective," fund managers at Halbis, an investment unit of HSBC Group wrote in response to the survey. Falling out of favor compared with other Asian markets is Japan, thanks the country's sensitivity to global economies. Still when viewed on fund managers' global portfolios Japan remains a slight overweight. Also out of favor thanks to global economic concerns is Taiwan. But Singapore moved up in some manager's estimation, rising to a slightly overweight from a slightly underweight rating in recent months. One reason is a sense that the country can serve as a safe haven. "Although we have been neutral Singapore due to the strong run-up in the market in the first half of the year, shift to overweight is due to what we believe is the defensive nature of its growth and its well-deserved safe haven status," Henderson's Brooks wrote. Broadly equities remain favored over bonds and cash in the long-run, though some managers have decreased exposure to stocks for now. "Overall our instinct is that equity markets will be stuck in a rut for the next two-to-three months," said Geoff Lewis, head of investment services at JF Asset Management. Still, "on a one-year basis we still expect equities to outperform both bonds and cash," he said.

BOJ's Suda: Japanese Economy May Overheat If Rate Hike Is Delayed

A Bank of Japan policy-maker voiced caution Thursday about the outlook for the U.S. economy and global markets in the wake of the subprime-mortgage crisis, but warned that Japan's economy runs the risk of overheating if the central bank postpones interest-rate hikes for too long.

Miyako Suda, considered a relative hawk on the BOJ's nine-member board, said the bank will look at economic and price conditions and the "uncertainty" surrounding them when setting interest rates. But the bank, she added, should maintain a forward-looking approach and not be constrained by the actions of central banks elsewhere. Suda's comments, in a speech to business leaders in Mie prefecture, may add to speculation that the bank wants higher rates but is willing to tread cautiously until global markets recover from the turmoil caused by the troubled U.S. housing sector. A week ago, the BOJ held interest rates steady at 0.50% its latest policy board meeting. Gov. Toshihiko Fukui signaled after the meeting that the central bank may be resigned to keep rates on hold for now because of global credit-market woes stemming from the U.S. subprime-mortgage crisis. The BOJ "must not let our guard down, as markets are likely to remain prone to instability," Suda said. How problems in the U.S. subprime mortgage market were spread to worldwide financial markets has become clearer over recent weeks, but "we can't predict at all when the fog over those problems will clear up," Suda told a news conference later in the day. "While I feel that the fog may dissipate more quickly than expected, it's also possible it will thicken." But her overall comments indicate that she sees the need to bring Japan's low rates up to "normal" levels over time. Suda said she can't tell what levels are normal now, though some analysts estimate they are around 2%. "If we adjust interest rates too slowly, the risks of economic overheating will increase," Suda said. "To avoid falling behind the curve, I think it's desirable if we act somewhat early."

A Bearish Cue?

Market players took Suda's remarks as a bearish cue, with Japanese government bonds extending their losses and 10-year yields climbing to their highest level since mid-August after her speech. "Given her speech, she may join (BOJ board memeber Atsushi Mizuno) in proposing a rate hike at the BOJ's November meeting," said Susumu Kato, chief economist at Calyon Securities in Tokyo. "If she joins Mizuno in voting for a rate hike, it could have a strong effect on" the central bank's governor, he said. Suda meanwhile cited a "high possibility" that the subprime crisis and persistent U.S. housing market slump would delay a U.S. economic recovery, but said the crisis will have little direct impact on Japan. "I don't think (the Japanese economy) will divert from our standard scenario" that it will keep expanding moderately, backed by worldwide growth, she said. In reaction to the crisis, the U.S. Federal Reserve Bank earlier this month cut its key federal funds rate by 50 basis points, and the European Central Bank stepped back from an anticipated rate hike. Those moves were seen to have tied the BOJ's hands even if it had wanted to raise rates. But Suda said the BOJ will keep an independent course. "There's no way our monetary policy will be constrained by foreign central banks' policies," she said. "What matters is not whether the (Fed) has changed its policy. The point in making policy decisions will be on how instability in the financial markets and a slowdown in the U.S. economy will affect" the BOJ's outlook for the Japanese economy. Even if a U.S. economic downturn means a drop in Japanese exports to the U.S., "I don't think that will have any major impact on the outlook" for overall Japanese exports, Suda said, given growing sales of Japanese products in China, Europe and elsewhere. Commenting on falling Japanese consumer prices, Suda said it could be due to Japanese businesses' high productivity and efforts to cap workers' paychecks, as well as imports of cheap products. But she predicted that prices will rise, perhaps even at a quicker-than-expected rate, in the future given the high costs of imported oil, low chances of Japanese labor costs falling more quickly, and strong domestic demand. Some have warned that persistent low rates can cause asset bubbles -- such as the credit bubble that recently burst in the U.S., which some say was caused in part by the yen carry trade. "It's important to make efforts to pre-empt bubbles," Suda said. "In order to do so, it's essential to act early in a forward-looking manner and acknowledge risks before they" turn serious.

From Its Own Ashes, An Inflation Target May Rise

The idea of a U.S. inflation target, already on life support before the Federal Reserve's recent rate cut, has probably flat-lined now that the Fed's main concern is keeping the economy out of recession and not adding new policy rules.

But targeting could come back to life even stronger down the road, if supporters at the Fed play their cards right. That's because they can plausibly argue that having a numeric target right now would be useful amid uncertainty over the Fed's inflation-fighting credibility. Fed watchers had expected the arrival of Ben Bernanke as Fed chairman in early 2006, and fellow inflation-target supporter Frederic Mishkin as a governor later that year, as virtual assurance of an inflation target regime, in some form. Many other central banks including the European Central Bank and Bank of England already have them. The Fed has a dual mandate of stable inflation and maximum sustainable employment, yet no specifics of where either should be. The Fed was once assumed to have a comfort zone for annual inflation of between 1% and 2% as measured by the price index for personal consumption expenditures excluding food and energy, though that was never official. That seemed on its way to changing. Last year, the Fed created a committee to review its communications strategy. The discussions, according to Fed meeting minutes, included the "advantages and disadvantages of quantifying an inflation objective." Several Fed officials, meanwhile, spoke approvingly of inflation targets in 2006 and into this year, even if they seemed to differ on the exact number. In June, Bernanke said the Fed was making "very good progress" in its communications strategy discussions. The idea has always been controversial on Capitol Hill. Yet the time for consensus both inside and outside the Fed is when monetary policy and the economy are stable. That was the case from mid-2006 until recently, when the fed funds rate was steady at 5.25% and the economy, while slowing, wasn't anywhere near recession. All that has changed. A housing and credit crunch has raised fears of recession, and the Fed last week responded by lowering the federal funds rate for the first time in over four years, by 50 basis points to 4.75%. "They kind of missed a window of opportunity (in late 2006 and early 2007) when things were quiet and the Fed wasn't moving" interest rates, said Ethan Harris, chief U.S. economist at Lehman Brothers.

Target Would Have Helped Anchor Expectations

Ironically, now is when an inflation target would do the most good by anchoring inflation expectations, which appear to be rising. In a speech on inflation targeting in 2003 when he was a Fed governor, Bernanke said, "short-run stabilization of output and employment is more effective when inflation expectations are well anchored because the central bank need not worry that, for example, a policy easing will lead counterproductively to rising inflation and inflation expectations rather than to stronger real activity." That line of reasoning in 2003 "would apply to a 'T' right now," said JPMorgan economist Michael Feroli. Yet various measures of Wall Street's confidence that the Fed will keep inflation low - the dollar, gold, oil, and breakeven spreads between nominal and inflation-linked Treasurys - suggest officials lost their handle on inflation expectations in the wake of last week's rate cut. That may, in turn, undo any economic good from rate cuts. To make matters worse, not only doesn't the Fed have a target to anchor expectations, even its long-assumed 1% to 2% goal is losing traction. In a speech Friday, Fed Vice Chairman Donald Kohn cited forecasts noted that most advanced economies are expected to post inflation rates between 1% and 3% this year, and referred to that as "good performance." Mishkin noted in a paper Friday that most major economies "have inflation rates around the 2% level, which is consistent with what most economists see as price stability." That would seem to put the Washington-based Board at odds with regional presidents like Jeffrey Lacker of Richmond and William Poole of St. Louis, who have said they prefer inflation around 1.5% over the long term. If the one-two punch of an aggressive rate cut, combined with remarks signaling that the Fed's inflation preferences may have risen, have damaged the central bank's credibility in the absence of a target, there may be a longer-term benefit: the case is that much stronger for one down the road. Imagine this scenario: the Fed manages to stabilize output by early next year and core PCE remains at or under 2% - it's running at a 1.9% year-over-year rate through July. An emboldened Bernanke then makes his semiannual Congressional appearance in early 2008 and repeats what he said when he backed inflation targets four-and-a-half years ago, but this time with current events as support: "The Fed is currently in a good and historically rare situation, having built a consensus both inside and outside the Fed for good policies. We would be smart to try to lock in this consensus a bit more by making our current procedures more explicit and less mysterious to the public," Bernanke said in March 2003.

Eurozone Confidence Takes Hit, Worse To Come

The euro zone's growth outlook showed further signs of weakening this week, putting an interest rate rise firmly on the back burner.

Business confidence measures from Germany, Italy, the Netherlands and Belgium dropped in September, with France the only country to buck the trend, reporting a stabilization in sentiment. But economists felt sure the worst is yet to come as the implications of tightening credit conditions for the world economy take time to sink in. "In our view it would be a mistake to see this softening as temporary," said Ken Wattret, an economist at BNP Paribas. "Once these surveys turn, they tend to trend in one direction for some time." The headline measure of Italian business confidence declined more than expected to 92.2 from a downwardly revised 93.8 in August, data released Wednesday showed. The deterioration, which economists said was mainly due to lower domestic orders, pushed the index to a 21-month low. In the Netherlands, business confidence dropped to 7.5 in September from 7.8 in August, according to the Dutch Central Bureau of Statistics, and the Insee measure of French business confidence leveled off at 110 in September, ahead of economists expectations of a decline to 108. The decline in the Italian and Dutch business confidence measures follows hot on the heels of a sharp dip in Germany's closely watched Ifo index, which fell for a fourth straight month in September to hit a 19-month low. Munich-based Economic Research institute, Ifo, Tuesday said its Business Climate Index had dropped to 104.2 from 105.8 in August, sharper than the 105.0 predicted by economists. That came on the back of a sharp decline in the Belgian business confidence, often described as the bell-weather of European sentiment, which came in at 1.5, far below expectations and well beneath the 7.8 level recorded in August.

Eurozone's Economic Growth Threatened

Combined, these indices added to fears that the recent credit crunch and the unprecedented strength of the euro are impeding the euro zone's economic growth. With concerns over the outlook for the economy growing, the ECB appears increasingly unlikely to add to the eight rate hikes it has announced since December 2005. "These indicators have clearly and collectively been influenced by recent turmoil in financial markets and the downward trend in confidence is consistent with our view that the ECB is unlikely to hike rates again," said Sunil Kapadia, an economist at UBS Investment Research. Despite recent data suggesting that the credit crunch is having a negative effect on the real economy, the ECB has yet to abandon its tightening bias, signaling its intention to raise its main policy rate to 4.25% from 4.00%. In September it postponed such a move, entering a "wait and see" mode as it assessed what impact the market turmoil would have on the euro zone's economy. But Wednesday's data will add to the view that another hike is off the cards, especially if other indicators fall. And those figures don't bode well for the euro zone-wide barometer of economic sentiment, due Friday, either. In August, that measure fell for the third straight month, to 110.0, coming in below economists expectations. Since then, economists said conditions in the money and credit markets have worsened and, combined with the rising euro exchange rate and tighter monetary policy, this will likely send the measure lower.

Yen Seen In Favour As Global Turmoil Recedes

As the turmoil in global financial markets recedes, the yen could well find itself back in favor.

Not only is investor appetite for carry trade unlikely to be as strong it was before the turmoil started, but Japan is likely to come out of the crisis in better shape than its competitors. And - as this coming Monday's Tankan survey from the Bank of Japan is likely to show - a rate hike could now be back on the agenda. "Our economists see upside risks to their forecasts for the Tankan and we think rate (rise) expectations could be revived, should the data surprise to the upside," said Alina Anishchanka, a currency strategist with UBS in London. Hints that the Bank of Japan may already be starting to lean this way were evident in the minutes of last month's board meeting, released Tuesday. Despite the fact that the meeting was held in the midst of a meltdown in global credit markets, the board retained a hawkish tone about the need to keep a tight grip on policy. "The board hinted that they are still eager to make another incremental tightening once credit markets calm," said Greg Gibbs, a senior currency strategist with ABN-Amro in Sydney. Key to this increase in rate expectations is rising evidence that, unlike in the U.K. and the euro zone, the impact of the subprime mortgage crisis on Japanese financial institutions has been minimal. In the minutes, the Bank of Japan said "members agreed that Japanese financial institutions' exposure to credit products including subprime-related ones was not significant and that developments in the corporate bond and commercial paper markets suggested that the accommodative environment for corporate finance was unlikely to change markedly."

BOJ's Tightening Likely

Therefore, with Japan likely to escape the credit crunch impacting on policy elsewhere, the Bank of Japan is in a position to resume tightening rates. As far as the yen itself is concerned, that shouldn't be a problem. Despite the yen's sharp rise in recent months, Japanese exports are holding up well with recent trade data showing the country's surplus surging 287.6% in the year to August, with exports alone climbing 14.5% in that period. Also, with rates headed up, the currency's attraction as a low-yielder to be sold in favor of high yielders as part of a carry trade is likely to diminish. At the same time, market interest in carry trades is likely to wane. Despite a recovery in investor risk appetite to levels last seen at the end of July, before the subprime crisis really exploded, investor interest in relative yields is likely to subside as global economic growth slows. Another important source of support for the Japanese currency could be Japanese investors themselves, as yen-negative flows into overseas assets show signs of drying up. Although end-month interest in higher yields abroad may have helped to push the yen lower midweek, analysts report increasing caution by investment funds in putting money outside Japan. "For the month of September, we believe investment trust outflows have been less than in August and July," said Derek Halpenny, a senior currency economist with Bank of Tokyo-Mitsubishi UFJ, noting that the take up of a recent investment trust launched by retail Japanese investors has declined. Some of this could have to do with the introduction at the end of this month of new regulations curtailing the flow of leveraged investments overseas. On top of this, the appetite of corporate Japan for foreign exchange is also reduced. "The fact that many Japanese importers took advantage of the plunge in dollar/yen in August probably means less is being done as we approach the end of the fiscal half year," Halpenny added. And finally, those who thought the yen might suffer from Yasuo Fukuda's appointment as prime minister this week could also find themselves wrong-footed now that he has reappointed most of former Prime Minister Shinzo Abe's old cabinet. Although some still fear that Fukuda will pursue more expansionist fiscal policies, in an effort to boost the LDP's low standing ahead of elections, other see him as a safe pair of hands. "The inauguration of Fukuda as Japanese prime minister was supportive of the yen, given his pacifist stance and hence stabilizing role on the world stage," said Hans Redeker, head of global foreign exchange at BNP Paribas in London. Early Thursday in Europe, end-month adjustments as well as continued decline in risk aversion is helping to push the dollar and high-yielders higher. At 0702 GMT, the dollar had risen to Y115.63 from Y115.53 late Wednesday in New York. The euro was also up at Y163.68 from Y163.18. The euro had risen to $1.4157 from $1.4127.

Buffett May Consider Bear Stearns Stake

Warren Buffet Reportedly Considering Buying Minority Stake in Bear Stearns.

Legendary investor Warren Buffett may be considering buying a minority stake in the nation's fifth-largest investment bank, according to a New York Times report.

The newspaper reported on its Web site Wednesday that Bear Stearns Cos. had been talking with Buffett and several other possible investors, including Bank of America Corp., Wachovia Corp. and two Chinese institutions: the Citic Group and China Construction Bank. The Times story relied on anonymous sources who had been briefed on the discussions.

Bear Stearns shares jumped as much as 12 percent after the report that it might be negotiating the sale of a part of the company, and the shares closed up $8.76, or 7.7 percent, to $123. At least two analysts upgraded Bear Stearns because of the speculation.

Andy Kilpatrick, the stockbroker-author of "Of Permanent Value, the Story of Warren Buffett," said it seems like only one in about 12 rumors about what Buffett's Berkshire Hathaway Inc. might buy is true.

But this time there's a connection: Buffett and Bear Stearns Chief Executive James Cayne are friends and have played bridge together in the past.

"I would believe Buffett is talking to them because they are friends, but how far it's gone who knows," Kilpatrick said.

Buffett typically doesn't discuss specific investments beforehand, and Berkshire spokeswoman Jackie Wilson declined to comment Wednesday.

Punk Ziegel analyst Dick Bove upgraded Bear Stearns from "sell" to "market perform" Wednesday because he was encouraged by the rumors that someone may invest in the Wall Street brokerage.

"The company was in too much trouble to solve its problems on its own," Bove said.

Bove said Bear Stearns needs significant financial backing so it can be more competitive, and it needs to diversify its business away from mortgages. He said Bear Stearns also needs help expanding internationally and could use new management.

But Bove said he did not think Buffett would be the one to invest in Bear Stearns because Berkshire doesn't seem like a good fit for the brokerage's needs.

Plus, Buffett routinely states in his annual letter to shareholders that Berkshire won't participate in bidding wars for acquisitions.

Standard & Poor's analyst Matthew Albrecht also upgraded Bear Stearns Wednesday from "strong sell" to "hold." He said in a research note that investor sentiment about the company had improved.

Bear Stearns declined to comment earlier in the day on reports it would sell a stake in itself, and it did not immediately respond to messages left Wednesday afternoon seeking comments on the newspaper report.

Officials at Bank of America and Wachovia, which are both based in Charlotte, N.C., declined to comment on the market speculation about a Bear Stearns deal.

Class A shares of Berkshire stock gained $100 to close at $116,990 Wednesday.

Berkshire owns furniture, insurance, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as The Coca-Cola Co. and Wells Fargo & Co.

Singapore Aims To Move Further Up Petrochemicals Chain

Singapore is further sprucing up its infrastructure and will even expand Jurong Island to attract investors to continue growing its chemical manufacturing base, particularly for olefins, high-end petrochemicals and specialty chemicals as it aims to move away from low-end products.

"We are trying to differentiate ourselves and move beyond competing with the Middle East and China. We want to compete with the more established countries like Japan and Germany, and 'the Houstons' of the world," Julian Ho, executive director for energy, chemicals and engineering services at Singapore's Economic Development Board, told Dow Jones Newswires in an interview. But why olefins? "We need to have a critical mass of these (olefins) for companies to add value downstream," Ho said. Olefins - made up predominantly of ethylene, followed by propylene, butadiene and a host of other carbon and hydrocarbon molecules - are the core feedstock required for plastics, textiles, coatings, paints and a string of products, be it at the low or high end of the chain. By 2011, Singapore's olefins capacity will nearly double to 4 million metric tons a year from the current 2.1 million tons when Royal Dutch Shell PLC (RDSA) and Exxon Mobil Corp. (XOM) each start up new naphtha crackers in 2010 and 2011 respectively. The target is to raise the country's total olefins capacity to 6 million to 8 million tons a year, but no timeframe has been set. The additional olefins can come from new crackers or from methanol-to-olefins conversion, said Ho. But Singapore is unlikely to have any MTO projects before 2011. "We envision that if there's an MTO plant in Singapore, it will come after 2011 at the earliest," he said.

Reinforcing Its Infrastructure

To keep investors interested in Singapore, the government has already mapped out how else it can beef up its infrastructure besides building the Jurong Rock Cavern, a 1.47 million-cubic-meter underground storage facility to hold crude and oil products. Work is currently underway to upgrade Jurong Island's checkpoints to ensure faster traffic flow, where departure lanes will be reversed into arrival lanes during the early morning peak hours. The upgrading is expected to end in mid-2008. Additionally, two new security towers will be built to enhance security checks. All in all, S$1 billion (around US$666.5 million) has been set aside to reinforce its infrastructure within five years. A separate amount of money will be allocated to expand Jurong Island to 3,200 hectares from 3,000 hectares currently through land reclamation, but an actual time frame has yet to be set. So far, its efforts have already borne fruit, with 20 more chemical and non-chemical projects waiting to come on line on the island, which is currently home to around 90 manufacturing plants. The upcoming projects, which will produce high-end petrochemical products using advanced technologies, include those of the U.K.'s Lucite International, Japan's Mitsui Chemicals Inc. (4183.TO) and Shell. Lucite International will roll out is patented Alpha technology for the first time ever, after having developed it over the last 12 years. This technology will enable Lucite to use readily available feedstocks such as ethylene as opposed to the more expensive acetone. The process will be adopted at its US$150 million 120,000-ton-a-year methyl methacrylate plant slated to come on stream in the second quarter of next year. Methyl methacrylate is used in digital devices and liquid crystal displays, as well as plastic and coatings. According to Ho, besides infrastructure, protection of intellectual property is also a key reason Lucite decided to introduce its technology in Singapore rather than in China, where it already has a methyl methacrylate plant. For the same reasons, Shell is also implementing its Omega technology at its upcoming 750,000 ton-a-year monoethylene glycol plant in Singapore, scheduled for commercial operation in 2009-2010. The technology will allow Shell to achieve a higher monoethylene glycol yield compared with other methods. Applications of monoethylene glycol include coolants and packaging material production. Meanwhile, Mitsui Elastomers Singapore Pte. Ltd., a unit of Mitsui Chemicals, is doubling the capacity of its patented Tafmer alpha-olefin copolymer in Singapore by building a US$165.8 million 100,000 ton-a-year plant. Construction will begin in March next year, and the facility is expected to begin operating in August 2009. Mitsui's Tafmer is a flexible and light resin modifier used to improve impact resistance for molding materials such as automobile bumpers. It can also be applied to the midsoles of athletic shoes. These are but a few of the high-end manufacturing projects on the list, and Singapore wants more 'first-of-its-kind' or advanced technologies to be introduced into the country.

The Dollar's Prospects Are Clouding Over

The dollar's outlook is deteriorating rapidly.

The U.S. Federal Reserve's decision to cut interest rates 50 basis points a week ago may have eased concerns over a global credit crunch and triggered a recovery in risk appetite. However, the move has failed to provide any reassurances on the U.S. economy and the prospects of further rates cuts is keeping the U.S. currency under pressure. "Dollar weakness is likely to remain a theme as narrowing interest rate spreads continue to weigh," said David Simmonds, head of foreign exchange strategy at The Royal Bank of Scotland in London. Steve Barrow, chief currency strategist at Bear Stearns International in London, warns against expecting any early respite either as the dollar is more likely to suffer from bad U.S. economic news than benefit from any positive data as the Fed isn't likely to start hiking rates again at this stage. "This should keep the dollar on a soft note going forward, not just through this week, but over the long haul as well," Barrow said. Of course, some still hold out some hope of an early dollar rebound. Alina Anishchanka, a currency strategist with UBS in London, argued that if Fed Chairman Ben Bernanke convinces the market that the Fed's rate cut wasn't just a preemptive move, but reflected poor economic data that may not be available to the market yet, then the dollar might recover. "We maintain our view that the extent of the weakness in the dollar isn't justified," Anishchanka said. For the moment, though, there is little sign of dollar support emerging with the dollar's trade weighted index falling to a 15-year low of 78.398 and sitting just above its all-time low at 78.19.

Risk Appetite Risen

As credit crunch concerns have faded, risk appetite in general has risen - with investors piling back into high-yielding currencies at the cost of low-yielding ones such as the yen. As a result, not only have commodity currencies such as the Australian, New Zealand and Canadian dollars found renewed strength over the last week, but much more risky emerging market currencies have also come back into vogue. Greg Anderson, a currency strategist with ABN AMRO in Chicago, noted that the MSCI emerging market free local currency equity index has risen to a new record. At the same time, the world market index has recovered 70% of the losses it made when it fell from a record high in July to a new low in August. "The recovery in equities in general matches some relief in credit markets over the last two weeks, where the Fed rate cut and liquidity injections have allowed commercial paper and LIBOR rates to ease," Anderson said. However, the more relaxed market concerns about a global financial crisis aren't being reflected in the dollar. Although lower rates may have helped to reduce the risks of a U.S. recession developing as a result of the country's subprime mortgage problem, there is growing concerns that easier monetary policy will run the risk of encouraging inflation. "Our macro view is that the Fed move has papered over the cracks, with an unfavorable tradeoff between growth and inflation still a major threat to economic and financial market stability," said Steve Pearson, chief currency strategist with Bank of Scotland in London. And new data on the U.S. housing market due later this week, is unlikely to help, said Paul Chertkow, head of global currency research with Bank of Tokyo-Mitsubishi in London. "Data on existing home sales and new home sales later this week are likely to increase concern over the economic outlook," Chertkow said, noting that the dollar is already suffering from the curve in the futures market suggesting that the Fed will engineer two more 25-basis-point rate cuts before the end of the year. "The risk is that the FOMC will be obliged to ease its monetary stance much more substantially," he warned, suggesting that this will keep the dollar sliding against the euro, and even more so against the yen. Early Tuesday in Europe, concern about the U.S. economy continued to dominate market sentiment with the dollar edging down to Y114.70 by 0645 GMT from Y114.91 late Monday in New York, according to EBS. The euro was a little lower, however, at $1.4072 from $1.4084 as a yen rally, driven largely by easing political concerns, pushed the euro down to Y161.40 from Y161.84. The euro isn't being helped by forecasts that the latest Ifo index from Germany later Tuesday will show a decline to 105.0 this month from 105.8 in August.

Yasuo Fukuda Elected As Japan's New Prime Minister

Yasuo Fukuda, a quiet compromiser who has promised to bring stability and moderation to Japan's tumultuous political scene, was elected prime minister by the lower house of Parliament on Tuesday.

The weaker upper house later voted for opposition leader Ichiro Ozawa, forcing a conference between the two chambers. The two sides, however, failed to form a consensus - a move that confirmed Fukuda as prime minister under parliamentary rules. The vote thrust Fukuda, 71, into the difficult job of battling calls for snap elections, negotiating with a resurgent opposition, and rebuilding the hobbled ruling Liberal Democratic Party left behind by his nationalist predecessor, Shinzo Abe. "The situation surrounding the LDP is very severe, and we face difficulty in keeping the government under control without cooperation from all party members," Fukuda told reporters after the election. Fukuda's Cabinet was to be announced later Tuesday. His first order of business will be winning passage of legislation extending Japan's naval mission in the Indian Ocean in support of U.S.-led forces in Afghanistan. The opposition, which controls the upper house, has vowed to defeat it. In the vote for prime minister, Fukuda garnered 338 ballots in the lower house, many more than the 239 needed for a majority. His closest competitor was Ozawa, the leader of the opposition Democratic Party of Japan, with 117 votes. Fukuda, the first son of a prime minister to also serve in the post, has pledged to keep Japan as a strong U.S. ally in the fight against terrorism, improve relations with Asia, and address growing inequalities in the world's second-largest economy. The lower house vote came hours after Abe, 53, emerged from a hospital - where he has been since Sept. 13 after announcing he would quit - to dissolve his Cabinet and formally resign after only a year in office. Fukuda was selected president of the ruling Liberal Democratic Party on Sunday, and has been setting up his administration since then. On Monday, Fukuda tapped the heads of three internal LDP factions that had supported him for top party posts, immediately triggering criticism from the opposition that he was rewarding allies with no regard for policy. The opposition on Tuesday showed no signs of backing off its intention to use its majority in the upper house to block the Afghan measure, despite Fukuda's vow to push for negotiations in search of a compromise. "We are fully prepared to discuss anything with the LDP, but Mr. Fukuda hasn't presented us his political vision," said Democratic Party executive Kenji Yamaoka.

Taking Over An Uphill Task

Fukuda inherits a political landscape left in tumult by Abe's troubled leadership. Abe stunned the nation when he announced Sept. 12 that he wanted to quit, and checked into a hospital the following day for unspecified stress-related abdominal complaints. He told reporters on Monday that he quit because of ailing health. "I want to extend my apologies to the people for not being able to complete my duties," Abe said Tuesday in a statement that outgoing top government spokesman Kaoru Yosano read to reporters following the Cabinet's final meeting. Though popular at the outset of his term, Abe's approval ratings had fallen to about 30%. Four Cabinet ministers resigned in money-related scandals, and an agriculture minister committed suicide in May. A final blow came when he led the LDP to elections in July in which they lost control of the upper house to the opposition - a defeat that has ignited growing calls to hold snap elections for the lower house to further test the LDP's popularity. Fukuda, whose father Takeo Fukuda served as prime minister from 1976 to 1978, is known as a steady, experienced hand in political negotiations. He served as chief Cabinet secretary in 2000-2004, but had to resign after saying he had unwittingly skipped payments to the national pension system. His arrival essentially put Abe's nationalist agenda in the deep-freeze. Abe had pushed to revise the pacifist Constitution, bolster patriotic education in public schools, and take an unapologetic view of Japan's World War II invasions. Few in Japan expect Fukuda to have an easy spell in office. "The LDP chose its new leader, but the party crisis is not over," the national Mainichi newspaper said in an editorial. "Fukuda must live up to his words that the government and the LDP will start over anew."

Capital Markets Improve, Some Say; Others Warn Not So Fast

A week after the Federal Reserve's hefty interest rate cut, financial market participants and officials are pointing to some hopeful signs suggesting calmer times ahead.

Finance officials around the globe Monday pointed to financial markets that are continuing to show encouraging signs of improvement, while recent remarks from major Wall Street firms have also indicated increased activity, notably in the loan market. There's evidence to back up the optimists: Corporate debt issuance has picked up smartly and the risky loan market is showing the first signs of life since the summer upheaval as underwriters market a $5 billion chunk of the loan piece needed to fund the First Data Corp. (FDC) buyout. The commercial paper market, the center of the recent market storm, is slowly, though shakily, improving. But at the same time, there are those who warn that working through the current market woes - whose origins lie in the U.S. subprime mortgage market but have spread beyond that sector - will be a lengthy affair. And they too have evidence on their side.

On The Way To Normal Conditions

Early Monday morning in New York, Anthony Ryan, Treasury assistant secretary for financial markets, was among those officials pointing to signs of improvement in capital markets. "We recognize the market liquidity is continuing to improve," said Ryan in a question and answer session following prepared remarks delivered at The 2nd Euromoney Inflation Linked Products conference in New York. A similar view point had come earlier in the global session from across the globe, as the Reserve Bank of Australia published its financial stability report, though the central bank was quick to warn that it is still too early to rule out further market turbulence and strained liquidity conditions. "While conditions in global markets remain tight, the past week has seen inter-bank spreads decline appreciably and some easing in funding conditions," it said. The RBA has been withdrawing liquidity from the domestic banking system over the past week, a hopeful sign of increasing confidence at the central bank as the dislocation in the short-term money market eases. The stickiness in financial markets was set off early this summer as investors became wary of risky assets after large subprime mortgage market bets went wrong. Short-term borrowing markets have been the hardest hit over the last few months, with investors largely unwilling to loan out funds for longer periods. That forced central banks across the developed world, from Australia to Japan, from the euro zone to the U.S., to add sometimes massive amounts of additional funds into their domestic markets in an effort to restore the smooth functioning. But the Fed's bold rate cuts - it lowered both the target fed funds rate and the discount rate for emergency borrowings by 50 basis points to 4.75% and 5.25%, respectively - seems to have done the trick for now, at least in terms of investor confidence. The major Wall Street brokers that reported last week were mostly upbeat that the recent market turmoil was coming to an end and capital markets were reopening for business. Last week, Goldman Sachs (GS) Chief Financial Officer David Viniar said he sees early signs of a revival in the loan sales market, adding that he is confident the global economy will stay strong and stimulate future earnings. Despite the major disturbances in the credit and mortgage markets, Goldman reported a 79% surge in fiscal third-quarter net income amid record revenue. The Fed's larger-than-expected cut in interest rates last week "certainly has left a better tone in all of the financial markets," Viniar said. "There seems to be reasonable growth worldwide."

Not so fast

Yet conditions still remain far from normal, with the dollar benchmark three-month lending rate, the London interbank offered rate, still stuck at 5.20%, significantly above the fed funds rate that it normally tracks pretty closely. The beleaguered U.S. housing market continues to suffer, and more stress is expected in coming months as low introductory "teaser" mortgages reset to higher rates. Those concerns were highlighted by the International Monetary Fund in its latest Financial Stability Report Monday. The IMF said that the credit crisis plaguing international markets will probably be "protracted" and slow growth of the global economy. "The potential consequences of this episode should not be underestimated and the adjustment process is likely to be protracted," the IMF said. "Credit conditions may not normalize soon, and some of the practices that have developed in the structured credit markets will have to change." While the effects of financial market turbulence sparked by losses in the U.S. subprime mortgage market have so far mostly touched the U.S. and Europe, the IMF said, developing countries, namely those that have experienced rapid credit growth in recent years, could also come to suffer, and global expansion will likely slow amid credit repricing. The IMF also stressed that regulators need to change the way they supervise financial institutions, incorporating lessons learned in this first test of new, innovative financial products used to distribute credit risks. Among the potential risks the IMF said could suggest further turmoil ahead are home prices falling further as lending standards continue to tighten, and less consumer spending if the stock market were to suffer significantly. Stubbornly high short-term borrowing rates could also curb capital investment by companies, and most damaging, overall credit availability could be disrupted, the IMF said. "The chances of more severe tightening of credit conditions cannot be dismissed," said the IMF. "Such a tightening could have significant global macroeconomic consequences, with the incidence of such tightening falling most heavily on more marginally creditworthy borrowers."

India's Central Bank Remains On Guard Vs Inflation

The Reserve Bank of India is likely to keep a tight rein on monetary policy for the rest of the year, even as Indian's economy comes off its gallop, due to concerns about latent inflationary pressures.

It's not a popular stance. A string of rate hikes are starting to crimp spending on cars and other consumer durables, leading industry bodies and prominent bankers to clamor for the RBI to reverse course and cut rates for the first time in four years. The U.S. Federal Reserve's rate cut last week led to calls for the RBI to follow suit. But the RBI is more worried about lingering inflationary pressures, even if turbulence in global financial markets that erupted in late July had seemed to enhance the downside risks to India's economy. Loan growth has slowed somewhat recently but analysts say it is likely to pick up again during October-March period as Indians increase spending on consumer durables during the festival and harvest season. Meanwhile, money supply growth remains strong, posing potential inflationary dangers. That means RBI Governor Yaga Venugopal Reddy will likely remain vigilant against inflation, analysts say. "Two quarters back the RBI was talking about overheating in the economy. It will not make a drastic change in its stance with an interest cut now. We need stability in interest rates," said Samiran Chakraborty, chief economist at ICICI Bank, the country's second largest lender. Chakraborty said he expects the RBI to keep rates on hold for the next six to nine months.

Economy Slowing, But Growth Still Fast

India's economy is showing signs of slowing down. But it's hardly a hard landing. Inflation, measured by wholesale prices, is at a five-year low of 3.32%, well below the RBI's comfort level of around 5% for the current financial year. On-year loan growth eased to around 23% in the four months to Aug. 31 from about a 30% average over the last four years. Industrial output grew 7.1% on year in July, the slowest pace since October 2006, and a much slower than growth of 9.7% in June. Most analysts expect India's economy to continue to grow between 8.5%-9% this fiscal year, easing slightly from an expansion of 9.4% last fiscal year that ended March 31. The weaker data reflect the central bank's steady efforts to cool the economy. Since January 2006, the RBI has raised its key lending rate, the repo rate, six times by a total of 150 basis points to 7.75% and its key borrowing rate, the reverse repo rate, three times by a total of 75 basis points to 6%. It has also hiked thrice this year the amount of cash that banks must set aside with the central bank. The cash reserve ratio now stands at 7%. Some Indian business leaders say the RBI has gone too far. India's main industry lobby, Confederation of Indian Industry, recently said that high interest rates are a cause for concern. A poll it conducted showed that 69% of chief executive officers it surveyed said the benchmark lending rates of banks should be lowered to about 12% from the current level of 13.25%. But the RBI's focus remains on inflationary risks. For one, the recent dip in inflation may be temporary. A large reason for recent benign inflation readings is a favorable base effect compared with elevated readings a year earlier. Meanwhile, crude oil prices continue to scale new highs, adding to India's import bill. The country imports two-thirds of its oil requirements. Lofty food prices are also creating inflationary pressure, said Ruth Stroppiana, director of Asia Pacific Economics at Moody's Economy.com. What's more, the money supply grew at a rate of 20% on year in the four months to Aug. 31, above the 17%-17.5% that the central targeted in its annual monetary policy review in April. In a recent speech, Reddy said: "It is, however, necessary to continuously assess the risks to the inflation outlook emanating from high and volatile international crude prices, the continuing firmness in key food prices and uncertainties surrounding the evolution of demand-supply gaps globally, as well as in India."

Capital Inflows Add To RBI's Woes

At the same time, the RBI isn't plagued by serious issues confronting the U.S. Fed: a steep housing downturn and associated problems in the market for risky mortgages and financial products based on them. Indian banks have little significant exposure to instruments like collateralized debt obligations, or CDOs, one type of instrument that has suffered from the U.S. subprime meltdown, analysts say. But the Fed's efforts to head off an economic downturn have compounded the inflationary challenges facing the RBI. The Fed's 50 basis point rate cut has spurred more capital inflows into India as investors seek India's higher yielding assets like the rupee and high-flying stocks. That's added to inflationary pressure in India. Barely two days after the Fed rate cut, the rupee hit its highest level in nine years, breaking past the 40 mark for the first time since May 1998. At 0605 GMT, the dollar was trading at INR39.82. Local stocks soared past the 16,000 mark for the first time fueled by foreign fund inflows which currently stand at over $10 billion to date in 2007. Some analysts say the RBI might raise its cash reserve ratio even more in a bid to temper the inflows. "If inflows remain strong and the appreciation of the rupee continues, the RBI may have to look at a cash reserve ratio hike," said Sujan Hazra, chief economist at Anand Rathi Securities.

Investors Eye Elevated Inflation Signs

In Aftermath of Rate Cut, Investors Watch Out for Signs of Accelerating Inflation.

Last Tuesday, Wall Street got exactly what it was angling for: a half-point reduction in interest rates. Now it wants to make sure rates will stay low.

This week, investors will be looking for signs that inflation is under control. If prices accelerate, the Federal Reserve may bump rates back up. The market is also hoping that readings on durable goods demand, the housing market and consumer spending power will show that the economy isn't heading for recession.

The risk of inflation is why the Fed didn't cut rates for four years. Last week, it finally lowered the target fed funds rate by half a percentage point "to forestall some of the adverse effects on the broader economy" of recent housing, credit and stock market turmoil, and "to promote moderate growth over time." The Fed added, "it will continue to monitor inflation developments carefully," however.

Tuesday's rate cut, along with some strong corporate earnings reports, fueled a 2.9 percent rise in the Dow Jones industrial average last week, a 2.8 percent jump in the Standard & Poor's 500 index and a 2.7 percent gain in the Nasdaq composite index.

It also sent gold prices soaring, crude oil to new record heights, and the dollar plunging. The U.S. currency reached all-time lows against the euro and is now equal to the Canadian dollar for the first time in more than 30 years. A weak dollar benefits U.S. exporters and companies who pull in revenue from overseas, but it can make imports more expensive and dollar assets, like U.S. Treasurys, less attractive to foreign investors.

There hasn't been any evidence yet of import inflation, said Jeff Kleintop, chief market strategist at LPL Financial Services in Boston. He noted that many exporters to the United States reduce prices to make up for the dollar's fall. But inflation could accelerate, which would prevent the Fed from lowering rates further or even prompt a hike.

The personal consumption expenditures deflator is released in the Labor Department's Friday report on personal spending. The core PCE, which eliminates volatile food and energy prices, is anticipated to show a year-over-year rise of 1.9 percent, according to the median estimate of economists surveyed by Thomson Financial.

"If we get a PCE that's higher than that, it may suggest the Fed acted too aggressively," Kleintop said. The Fed's comfort zone is between 1 percent and 2 percent.

Meanwhile, personal spending in August is expected to have risen by 0.3 percent after increasing by 0.5 percent. Though it's not directly correlated, investors will try to gauge future spending patterns through consumer confidence reports from the Conference Board and the University of Michigan, on Tuesday and Friday, respectively.

Bad news on the housing front has become a given on Wall Street, but market participants will continue to monitor the industry's failing health. On Tuesday, the National Association of Realtors reports on existing home sales and homebuilder Lennar Corp. releases its quarterly earnings. Later, on Thursday, the Commerce Department comes out with its new home sales data, and KB Home posts its earnings.

Because the market has already priced in a weaker consumer and sluggishness in the housing market, business spending "is the leg of the stool that's most important to the economy right now," Kleintop said.

The Commerce Department's Wednesday report on August durable goods orders will be particularly important. Economists are anticipating a 3.1 percent decline, following a solid 5.9 percent advance in July.

The next day, the Commerce Department releases its final measure of second-quarter gross domestic product, and Friday, the Chicago purchasing managers index of September manufacturing activity in the Midwest. The Chicago PMI is seen as a precursor to next week's September manufacturing report from the Institute for Supply Management.

Besides economic data, Wall Street will be watching out for profit warnings from companies ahead of October's flood of third-quarter earnings. Investors are a bit nervous about how corporate America fared during August's stock market volatility and credit tightness, but they are optimistic at this point, particularly given that international growth is a big source of income for many companies.

About 40 percent of earnings in the S&P 500 come from overseas, Kleintop said. "A lot of people think, as goes the economy, as goes the U.S. consumer, so goes corporate earnings. That's not necessarily so."

Weekend's Featured: What the Rate Cut Means for You

Fed's Half-Point Move Likely to Trim Payments on Credit Cards, Home-Equity Lines, but Offer Scant Relief on Certain Mortgages.

Consumers should soon start feeling the impact of Tuesday's Fed rate cut in the form of lower borrowing costs and stingier savings rates. But the rate cut doesn't offer much help for the key problems bedeviling many mortgage borrowers.

The Federal Reserve said it lowered short-term interest rates by half a percentage point, to 4.75%, to combat the effects of a weaker housing market and tighter credit on the broader economy. The steep reduction in the Fed funds rate surprised many on Wall Street who expected a more modest rate cut. Stocks on Sept. 18 rose sharply after the Fed's announcement, with the Dow Jones Industrial Average gaining 335.97 points, or 2.5%, to 13739.39.

The rate cut should reduce payments on many home-equity lines of credit, credit cards and some car loans. Perversely, however, some economists say it could lead to higher rates on fixed-rate mortgages down the road if bond markets expect the Fed move will spur higher economic growth or inflation.

There also is likely to be little immediate relief for borrowers with certain types of adjustable-rate mortgages. That's because the rates on some of these loans are tied to the London interbank offered rate, or Libor, which recently jumped sharply above the Fed funds rate because of the continuing credit crunch in the markets. Libor, which has drifted downward recently, is an interest rate charged by banks for short-term loans to each other.

"If Libor doesn't come down, there is no relief" for many mortgage borrowers, says James Bianco, president of Bianco Research LLC, a market-research firm in Chicago.

Borrowers who should see immediate benefits from the Fed cut are those holding loans tied to U.S. banks' prime rate. Consumers can contact their lenders to inquire how their rates are calculated. Many banks cut their prime rates by half a percentage point after yesterday's Fed move.

Here is a look at what the Fed's action means for consumers:

• Homeowners.
The rate cut is good news for borrowers with home-equity lines of credit, and savings could show up as soon as the next monthly statement. Borrowers looking for a new fixed-rate home-equity loan could also see lower rates. There are likely to be regional differences, with lenders most likely to cut rates on these loans in areas where the housing market is healthy and the local economy is robust, says Doug Duncan, chief economist of the Mortgage Bankers Association. Before the Fed's latest move, rates on home-equity lines averaged 8.72%, while home-equity loans averaged 8.29%, according to HSH Associates.

But in a twist, the Fed cut could boost rates down the road for 30-year fixed-rate mortgages. These rates are typically influenced by rates on 10-year Treasurys, which have moved lower recently in anticipation of a quarter-point cut in rates and because of a flight to quality in bond markets. But if markets expect a higher level of economic growth than previously anticipated, or a pickup in inflation, borrowers could see "some modest increase in fixed-rates going forward, though not necessarily immediately," Mr. Duncan says.

Recent news has been mixed for borrowers with adjustable-rate mortgages. Borrowers with ARMs that are tied to Treasury averages have benefited from a recent decline in rates. For those who are facing their first rate reset on Oct. 1, "that reset will be less painful than it would have been had it taken place a couple months ago," says Greg McBride, a senior financial analyst with BankRate.

But higher borrowing costs may still be in the offing for homeowners whose adjustables are tied to Libor. Libor is frequently used to set rates for subprime adjustables, loans made to borrowers with scuffed credit. As for non-subprime ARMs, roughly half of these originated in recent years are also tied to Libor, estimates Keith Gumbinger, a mortgage analyst with HSH Associates. Borrowers can determine which index their adjustable is tied to by checking their loan documents.

The rate cut isn't likely to do much for the biggest problem facing the mortgage market: a liquidity crunch that has made it tougher for many borrowers to get a loan. "People have been characterizing this as a bailout for housing, but I don't think that's accurate," says Mr. Duncan of the Mortgage Bankers Association. The rate cut is "much more about the broader economy," while the mortgage market's troubles are "all about credit and property values."

• Savers.
Savers could soon see lower payouts on their savings accounts, certificates of deposit and money-market mutual funds. In fact, some banks have already started to reduce their rates or scale back their deals. Bank of America Corp., for instance, recently shortened the maturities on its promotional CDs paying 5% to four months from eight months.

Nevertheless, banks are going to be reluctant to cut rates before their competitors, in part because consumer deposits remain one of the cheapest sources of funds available for the banks, says Bankrate.com's Mr. McBride. In fact, average CD rates have barely budged in recent months with yields on five-, three- and one-year CDs currently at 4%, 3.77% and 3.76%. "That is very uncharacteristic," since CD yields normally move well in advance of a Fed action, he says. "Savers are getting a break."

Average yields on money-market mutual funds, which have been hovering at 5% for about a year, are likely to drop to about 4.5% in the next month, says Pete Crane of Crane Data LLC. But part of the fall in yields may be counteracted by some managers' moves to buy higher-yielding asset-backed commercial paper, he says. As a result, there may be a benefit to shopping around since money managers can differentiate their funds' performance by investing in the higher-yielding securities.

• Credit Cards.
Many credit-card customers should soon see some relief. About 85% of all credit cards carry variable rates. But many holders of these cards will see a benefit only if their current rate exceeds any floors established by the issuers, typically around 14% to 15%, below which their rates can't fall. Today, most interest rates are in the 18%-to-19% range.

Since most issuers adjust their pricing on a monthly basis, about half of all variable-rate cards should see an adjustment in October, with the rest in November, says Robert McKinley, chief executive of CardWeb. "Consumers could find some money in their pockets in about a month." The half-percentage-point drop in rates should result in a savings of about $30 a month for the typical household, which carries a median credit-card debt of $7,000, he says.

• Auto Loans.
A rate cut isn't likely to have a big impact on new-car loans in part because more than half of all auto loans are already offered at reduced rates due to heavy manufacturer incentives, says Art Spinella, president of CNW Marketing Research Inc. But the Fed's move could make it cheaper to get a used-car loan because many people turn to banks and credit unions to finance their purchase, he says.

Still, consumers could start seeing better financing deals if the Fed continues to cut rates. Auto-loan rates, generally tied to the movement in Treasurys, already had started to ease given the recent drop in Treasury yields. Average rates on five-year new-car loans are 7.72%, versus 7.81% on July 4, according to BankRate.

• Student Loans.
Students with private, variable-rate student loans pegged to the prime rate may see their rates adjust more quickly than borrowers with loans tied to Libor. (Loans pegged to Libor or the prime rate are split about equally.)

But that doesn't automatically mean that borrowers should switch to prime-based loans. Historically, loans pegged to Libor have tended to yield a slightly lower rate than loans tied to prime over the life of the loan, says Mark Kantrowitz, publisher of FinAid.

Weekend's Special: Serengeti National Park, Tanzania

Discover Serengeti It was 1913 and great stretches of Africa were still unknown to the white man when Stewart Edward White, an American hunter, set out from Nairobi. Pushing south, he recorded: "We walked for miles over burnt out country... Then I saw the green trees of the river, walked two miles more and found myself in paradise." He had found Serengeti. In the years since White's excursion under "the high noble arc of the cloudless African sky," Serengeti has come to symbolize paradise to many of us. The Maasai, who had grazed their cattle on the vast grassy plains for millennia had always thought so. To them it was Siringitu - "the place where the land moves on forever."

The Serengeti region encompasses the Serengeti National Park itself, the Ngorongoro Conservation Area, Maswa Game Reserve, the Loliondo, Grumeti and Ikorongo Controlled Areas and the Maasai Mara National Reserve in Kenya. Over 90,000 tourists visit the Park each year. Two World Heritage Sites and two Biosphere Reserves have been established within the 30,000 km² region. It's unique ecosystem has inspired writers from Ernest Hemingway to Peter Mattheissen, filmakers like Hugo von Lawick and Alan Root as well as numerous photographers and scientists - many of which have put their works at our disposal to create this website. The Serengeti ecosystem is one of the oldest on earth. The essential features of climate, vegetation and fauna have barely changed in the past million years. Early man himself made an appearance in Olduvai Gorge about two million years ago. Some patterns of life, death, adaptation and migration are as old as the hills themselves. It is the migration for which Serengeti is perhaps most famous. Over a million wildebeest and about 200,000 zebras flow south from the northern hills to the southern plains for the short rains every October and November, and then swirl west and north after the long rains in April, May and June. So strong is the ancient instinct to move that no drought, gorge or crocodile infested river can hold them back. The Wildebeest travel through a variety of parks, reserves and protected areas and through a variety of habitat. Join us to explore the different forms of vegetation and landscapes of the Serengeti ecosystem and meet some of their most fascinating inhabitants. Welcome to the Serengeti. Magnificent Wildlife ".. The only living things which look as if they really belonged to it are the Wild Animals. Between the animals and Africa there is an understanding that the human beings have not yet earned .." Laurens van der Post, Venture to the Interior, 1963 Today, the Serengeti National Park, the Ngorongoro Conservation Area, and the Maasai Mara Game Reserve across the border in Kenya, protect the greatest and most varied collection of terrestrial wildlife on earth, and one of the last great migratory systems still intact. The Serengeti is the jewel in the crown of Tanzania's protected areas, which altogether make up some 14% of the country's land area, a conservation record that few other countries can match. Safari Safari, in Kiswahili, simply means "journey". But in English it has become a synonyme for a wildlife viewing adventure in the African bush. 'To go on safari' In Tanzania is, and always will remain a fascinating and exclusive experience! It is well known that Tanzania has beautiful nature reserves rich in wildlife. There are, however, still many false ideas about this big southern neighbour of Kenya. It is true that Tanzania, measured in terms of pro-capita income, is one of the world's poorest countries. It is a fact that the country can feed itself and, what is of greater significance, is that since independence Tanzania politically has been among the most stable African countries. In regard to safety, both for its own citizens and for tourists, it is well ahead of its more economically advanced neighbours. In the past, tourism was of little significance to Tanzania and few people chose to visit it. To have to deal with all the uncertainties, and at the same time not really be sure what natural attractions the country had to offer made one question whether the cost was reasonable. In fact this did not have a negative effect upon the nature reserves and even during the most difficult times major efforts were undertaken to maintain the national parks and also to create new ones. Today, several sections of the tourism infrastructure have developed well and a couple of new hotels and luxury, charming camps conforming to 'international' standards have opened. There is reason to hope that the difference between the local way of life and the standards of rich international tourists, which in many other third world countries has had such a negative impact, will be kept within reasonable limits. Human Footprints The human history of the Serengeti is largely the history of the African people, from the hunter-gatherers of the distant past who roamed the vast plains, to those today who preserve it as a prime destination for visitors. Apart from Olduvai Gorge, which is formally part of the Ngorongoro Crater Conservation Area but an extension of the Serengeti and part of its ecosystem, the area's history has been virtually ignored. Tsetse flies in the woodlands, and with them sleeping sickness, ensured that the Serengeti was spared the type of European encroachment, and with it the decimation of the wildlife that other African countries were subjected to. The Leakeys' famous excavations at Olduvai Gorge show that our forebears lived and hunted in the area for some two million years before the German and then the British colonisers arrived. Man has always been part of the Serengeti and many people, tribes and remarkable individuals have left their footprints on its endless plains.