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Australia's central bank raised its inflation forecast and said economic growth will slow as consumers reduce spending amid record gasoline prices and the highest borrowing costs in 12 years.

There “is evidence that demand has slowed, but it will take some time for this to have a substantial impact on inflation,'' the Reserve Bank of Australia said in its quarterly policy statement released in Sydney today. Inflation will peak late this year at 4.5 percent before falling below the bank's 3 percent limit in 2010.

The nation's currency fell on speculation Governor Glenn Stevens will refrain from interest rates again this year, after boosting its benchmark to 7.25 percent in March, the fourth increase in seven months. The government has said it will cut spending in next week's budget to ease pressure on prices, which surged at the fastest pace in 17 years in the first quarter.

“The Reserve Bank remains on hold for a prolonged period,'' said Rory Robertson, an interest-rate strategist at Macquarie Group Ltd. in Sydney. “Right now they've got reasons to think they have done enough, but obviously there are risks, particularly with the commodity price boom being so large.''

The Australian dollar pared earlier gains, falling to 94.03 U.S. cents at 4:34 p.m. in Sydney from 94.41 cents immediately before the report. The two-year government bond yield declined 5 basis points, or 0.08 percentage point, to 6.37 percent.

China Demand

Rising demand from China for resources including iron-ore and coal may offset the impact of slower domestic spending on the $1 trillion economy, now in its 17th year of expansion.

“It is possible that the recent weakness in consumer sentiment and domestic spending will prove to be mostly temporary, especially in light of the large boost to national income'' from exports, the bank said today.

The nation's terms of trade, a measure of export income, will rise by around 20 percent this year as new coal and iron ore contracts take effect, “well above the average increase over the past four years, and higher than appeared likely a few months ago,'' the central bank said.

Demand for exports is prompting companies including Rio Tinto Group to spend A$57.9 billion ($54 billion) developing mines and oil fields, stoking a record 18-month employment boom that has generated 456,000 new jobs.

Skills Shortage

Australia's labor market conditions “remained strong,'' today's report said, reinforcing figures published yesterday showing employment rose in April by twice as much as economists forecast. The jobless rate was 4.2 percent last month, close to the lowest in more than three decades.

Concern that a shortage of skilled workers is driving up wages and stoking inflation was a key reason Stevens and his board raised borrowing costs in March, February, November and August faxless payday advances.

There is a risk that expectations for higher inflation may become “entrenched at higher than acceptable levels,'' driving up wages and prices, the bank said today.

Core annual inflation surged to 4.4 percent in the first quarter from 3.8 percent in the previous three months, a report showed on April 23. The bank aims to keep annual prices increases between 2 percent and 3 percent on average.

“The high rate of underlying inflation in the March quarter indicates that demand pressures that have been evident for some time are continuing to have a significant effect on pricing, and are allowing increases in input costs to be passed through into final prices,'' today's report said.

Growth Forecast

The jump in consumer prices has occurred “in an environment of limited spare capacity and earlier strong demand,'' the bank said. “A significant slowing in the growth of demand from the rapid pace of 2007 will be needed in order to return inflation to the target over time. There are signs that such moderation is now occurring.''

The central bank cut its forecast today for growth in June 2009 to 2.75 percent from the 3 percent predicted in February. Gross domestic product will expand 2.5 percent in June 2010, compared with a previous outlook of 3 percent.

Recent reports support the central bank's view that the nation's economy is losing momentum. March home-building approvals fell six times as much as economists forecast, sales of newly built houses dropped for a second month, consumer confidence plunged in April to the lowest since 1993, and companies remained pessimistic for a third month in March.

Mortgage Rates

GDP slowed to 0.6 percent in the fourth quarter from the previous three months, when it expanded 1.1 percent. The first- quarter GDP report will be released on June 4.

Households, grappling with higher gasoline and food costs, are also facing extra increases in mortgage rates by commercial banks. The nation's five largest lenders, led by Commonwealth Bank of Australia, have added an average of almost 90 basis points, or 0.9 percentage point, to home-loan interest rates this year. The Reserve Bank has added only 50 basis points in that time.

“A noticeable restraining impact is being exerted on household and business borrowing and on all overall domestic demand,'' today's report said. Borrowing by companies has slowed significantly, it said.

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Chemed Corp. shares dropped 19 percent to close at $32.75 each after the company missed first-quarter earnings expectations and cut its profit outlook for the year.

Chemed blamed "recessionary pressures" for weaker results in its Roto-Rooter plumbing and drain-cleaning subsidiary. It now expects earnings of $3.05 to $3.20 per share in profits from continuing operations in 2008, down from an earlier forecast of $3.60 to $3.70 per share.

Chemed posted net income of 16.8 million, or 69 cents per share, in the three months ended March 31. That's slightly better than last year's profit of 62 cents per share, but short of the 85 cents that Wall Street analysts were projecting no teletrak payday loans. Sales increased 5.5 percent to $285.3 million for the period.

"The first quarter of 2008 clearly indicates recessionary pressures impacting demand for certain plumbing and drain-cleaning services," said a Chemed press release. "This is evidenced by an 11 percent decline in aggregate call volume tracked in Roto-Rooter's two centralized call centers."

Chemed (NYSE:CHE) is a Cincinnati-based holding company for Roto-Rooter and Vitas Healthcare, a hospice provider.

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Biogen Idec Inc. confirmed reports that billionaire investor Carl Icahn has filed a lawsuit against the Cambridge biotech company as a ploy to gain access to documents related to the failed sale of Biogen last year.

Icahn, a major shareholder in Biogen who has advocated for its sale, claimed in the suit filed in Delaware that Biogen executives sabotaged the sale process, and he wants copies of board minutes and other papers, according to published reports.

Biogen (Nasdaq: BIIB) ended its search for a buyer of the company in December 2007 after it received no serious offers freecreditreport.

"Our belief is that this request is simply another in a series of manipulative tactics to advance his single-minded agenda to force the sale of the company," said Biogen spokeswoman Naomi Aoki. She argued that Biogen has already made public most of the information requested by Icahn in the lawsuit.

With 4,300 workers worldwide, Biogen reported 2007 net income of $638.2 on revenue of $3.2 billion.

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Federal Reserve Chairman Ben S. Bernanke is being forced to throw out four decades of monetary history by a financial system choking on miscalculated risks and a deepening recession.

Bernanke and the four Fed governors voted yesterday to become creditors to Bear Stearns Cos., a securities firm that isn't a bank, by invoking a law that hasn't been used since the 1960s. Three days earlier, the Fed said it would swap Treasury notes on its balance sheet for privately issued mortgage-backed securities held by Wall Street firms.

“It's a re-drawing of the relationship of the Federal Reserve with the rest of the financial system,'' said Vincent Reinhart, former director of the Division of Monetary Affairs at the Board. Risks of so-called moral hazard, where firms will now come to count on bailouts by a federal agency, “are considerable,'' he said.

The cost of doing nothing may have been even greater, say other former Fed officials. Bernanke is attempting to keep the nation's financial machinery working as record home foreclosures make investors reluctant to hold even bonds backed by Fannie Mae and Freddie Mac, government-chartered firms. The 54-year-old Fed chairman is also trying to contend with a worsening economic slump: Reports this week showed that retail sales unexpectedly fell and consumer confidence slid to a 16-year low.

Meyer's Experience

“As a governor, you never want to be placed in this position,'' said former Fed governor Laurence Meyer, who served during the central bank's coordination of the rescue of hedge fund Long-Term Capital Management LLC in 1998. “Everybody has to be uncomfortable with this. But it is always, compared to what? Just imagine what would have happened today if this action hadn't been taken.''

Even with the bailout, stocks retreated. The Standard & Poor's 500 Index fell 2.1 percent yesterday to 1,288.14. The S&P Financials Index lost 4.1 percent. Bear Stearns tumbled $27, or 47 percent, to $30. Lehman Brothers Holdings Inc., Citigroup Inc. and Bank of America Corp. also declined.

“It has really spooked the market,'' Gregory Peters, head of credit strategy at Morgan Stanley in New York, said in a Bloomberg Television interview. “It has unraveled so fast that investors are worried about the next shoe dropping.''

Bear Stearns is a market maker in mortgage bonds, a primary dealer in U.S. Treasury notes and clears or settles securities transactions for other brokers and investment funds. While it doesn't take deposits from the public, it's as intertwined with the financial system as any bank payday loans in one hour.

Cost of Lending

“Most lending happens outside of bank balance sheets,'' said Mark Gertler, who has written papers on central banking with Bernanke and is a professor of economics at New York University. “We are seeing financial innovation, so you should expect innovation in the lender of last resort facility.''

Still, some economists said, the Fed may encourage risky behavior by backstopping financial institutions. Willem Buiter, a London School of Economics professor and former Bank of England policy maker, called the Fed's move “socialism for the rich, which is both inefficient and morally objectionable.''

Only last week, senior bank supervisors from the U.S., U.K., France, Germany and Switzerland blamed the crisis on poor communication, bad risk analysis and an under-estimation of liquidity needs by large financial institutions.

“There is no doubt the Fed has been nervous about extending its lending reach beyond banks that have a role in the payment system,'' said Marvin Goodfriend, a former senior policy adviser at the Richmond Federal Reserve Bank and now an economics professor at Carnegie Mellon University in Pittsburgh. “Is the credit crisis so bad that it requires a breach of longstanding conventions?''

Navigating the Storm

Former Treasury Secretary Lawrence Summers said the Fed is trying to navigate through a once-in-a-generation financial and economic storm.

Panic selling is lowering the value of stocks and bonds, spurring more selling. Unemployment is rising, reducing incomes and spending, and falling asset prices — including homes — are leading to a contraction in credit.

“That three-way combination feels like something we have not seen in this country in a very, very long time,'' Summers, now a professor at Harvard University, said in a Bloomberg Television interview in Washington. “It's a near-certainty we are in a recession and there is a real prospect that it could be a serious one without strong policy action.''

Fed officials meet to set interest rates on March 18. Futures traders put the chances of a 1 percentage point cut at 50 percent. A reduction of that magnitude would be the first in the two decades since the federal funds rate has been used to steer the economy.

“The name of the game is preventing disaster,'' said NYU's Gertler. “By letting one house burn down, you might have the whole neighborhood burn down. You want to avoid that.''

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Apple Inc. stuck to its sales target of selling 10 million iPhones by years’ end and said it plans to start selling the popular devices in India and China in 2008.

The news came at Cupertino-based Apple’s (NASDAQ:AAPL) annual meeting, a day after several analysts lowered their price targets on its stock citing the potential impact of a slowing economy on its sales pay day loan.

Apple also said it has no plans for a stock buyback or dividend.

Shareholders at the meeting approved a proposal to give them a nonbinding vote on pay packages for senior executives.

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Treasury Secretary Henry Paulson said the $150 billion economic stimulus package worked out by President George W. Bush and U.S. House leaders was a “rare bipartisan moment'' that's likely to be repeated in the Senate.

“I don't think the Senate is going to want to derail that deal,'' Paulson said on the “Fox News Sunday'' television program. “And I don't think the American public is going to have much patience for anything that slows down this process of getting money into our economy.''

Paulson cautioned lawmakers against making many changes to the plan worked out between the Bush administration and House leaders, which was announced on Jan. 24. He repeated that while he expects the economy to continue to grow after slowing “significantly'' late last year, “risks are to the downside.''

If the Senate approves the package “very quickly,'' Paulson said, “I think we're going to be able to move quickly and get the money out into the economy by May.'' That would make “a very big difference'' in the economy, he said.

Since the agreement between the Republican president and leaders of both parties in the Democratic-controlled House, members of the Senate, also controlled by Democrats, have suggested changes such as increasing unemployment benefits and food stamps.

“Once you start considering additions — the food stamps, unemployment insurance and so on, it's a slippery slope, and there is a real danger that we're going to bog down and screech to a stop,'' Paulson said later on CNN's “Late Edition.''

Paulson said he doesn't think the U.S. economy is in a recession. “The markets will be pleased to see us all come together in Washington and work something out,'' he said, adding that the Senate “needs to take action.''

Housing Slump

The housing slump probably worsened at the end of last year, bringing the economy to the brink of recession and prompting businesses to curb hiring and spending, economists said before government reports this week payday loans lenders.

Economic growth slowed to a 1.2 percent annual rate from October to December, a quarter of the previous three months' pace, according to the median estimate of economists surveyed by Bloomberg News. Other reports may show the unemployment rate held at a two-year high this month and consumer spending cooled in December.

While the agreement is a “good fundamental foundation to work from,'' House Speaker Nancy Pelosi of California has known all along that the Senate would make changes, Senator Charles Schumer of New York, chairman of the Joint Economic Committee, said last week in an interview on Bloomberg Television's “Political Capital with Al Hunt.''

Tax Rebates

About $100 billion from the package would pay for tax rebates to 117 million families and $50 billion would be for business tax breaks. The plan also addresses the rising number of foreclosures by allowing government-chartered mortgage companies Fannie Mae and Freddie Mac to buy home loans of as much as $729,750, up from the current limit of $417,000.

Under the package, individuals must earn at least $3,000 to receive a $300 rebate, while higher-income individuals would get up to $600 and couples could receive $1,200 plus $300 per child. Rebates would be limited to individuals earning less than $75,000 and couples earning less than $150,000.

Two business incentives were included in the package. One would allow large companies to deduct more of the price of new equipment they purchase this year. Small businesses would be allowed to deduct twice the current limit of $112,000 for new equipment purchases.

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