Europe, UK Leave Rates On Hold; Italian Senate Approves Austerity Measures

Devan Biswas
08 Sep, 2011
New York City

European Central Bank and the Bank of England left key lending rates unchanged and cited weak and uncertain economic outlook. The yield on 2-year Greek bonds soared to 60%. Italian Senate passed austerity measures and the government approved balanced budget constitutional amendment.

[R]3:20 PM Frankfurt – European Central Bank and the Bank of England left key lending rates unchanged and cited weak and uncertain economic outlook. The yield on 2-year Greek bonds soared to 60%. Italian Senate passed austerity measures and the government approved balanced budget constitutional amendment.[/R]

European Central Bank left its key lending rate on hold at 1.5% and the Bank of England left its benchmark rate at 0.5% and held its asset purchase program at 200 billion pounds.

The ECB left rates on hold after latest economic data suggested weakening economic growth and faltering employment growth. The central bank lifted rates in from a record low of 1% in April and again in July by 25 basis points.

The ECB President said at a conference that inflation is expected to fall below 2% in 2012 and lowered the bank’s assessment of the economic growth in the region and economy faces “high uncertainty and intensified downside risks.”

Economists anticipate the central bank to leave rates on hold for a while as banks are reluctant to lend each other and yields are on the rise for several government bonds in the last three months.

After the rate decision the German Bund of 10-year rose to 1.826% and Greek 2-year yield increased 1.5% to 60% after German Finance Minister Wolfgang Schaeuble said Greece must meet its euro zone obligations.

Central banks in Asia also left rates on hold amidst global economic uncertainties and falling exports to the U.S. and Europe.

The central banks in South Korea, Philippines, Malaysia and Indonesia left rates on hold today. Korea left its rate at 3.25% for the third month in a row but the central bank noted the weakening exports from the region.

The Organization for Economic Cooperation and Development noted weakening economic backdrop in 34 member nations in its later report released today.

The Paris based economic group lowered expectations of economic growth in the second half for Germany, France, Italy and the U.S.

The group estimated third quarter economic growth to decline to 1.4% for France, Germany and Italy and negative 0.4% in the last quarter of the year.

The O.E.C.D. estimated 1.1% economic growth in the U.S. in the third quarter and 0.4% in the final quarter of the year.

The report also noted that economic growth may be affected if the euro zone debt stress intensifies and banks struggle raise more capital in the second half.

Italian Prime Minister Silvio Berlusconi won the vote of confidence in the Senate after the market close. The austerity measures of 54 billion euros passed by the Senate will need a final approval from the lower house next week.

Italian austerity measures are expected to increase VAT by 1% and levy 3% tax on high income earners of more than 300,000 euros and cut various government spending and advance the increase in retirement age for women in private sector.

Italian government also approved the constitutional amendment that will require government to balance budget from 2014 unless parliament approved by an absolute majority vote.

“The state budget respects the balance of revenue and expenditure” will be inserted in the constitution and will need a two-thirds majority approval in parliament.

The yield of the 10-year government bonds declined to 5.25% from 5.6% in yesterday’s trading.

The European Union has been demanding that the balance budget mandate be enshrined in the constitution and recently Portugal and Spain approved similar measures.

FTSE 100 index decreased 0.1% or 3.2 to 5,315, DAX 30 index fell 0.6% or 32.90 to 5,373 and CAC 40 index added 0.3% or 9.9 to 3,083.

Stock Movers

BNP Paribas SA increased 1.7% to 32.18 euros, Societe Generale rose 0.8% to 19.49 euros and Deutsche Bank AG added 1.4% to 24.90 euros. Barclays Plc soared 1.2% to 158 pence.

Siemens AG decreased 1% to 67.63 euros and Philips Electronics added 1% to 13.12 euros. Alcatel Lucent declined 2 cents to 2.41 euros.

Volkswagen AG decreased 1% to 100.05 euros, Daimler AG fell 2.3% to 33.46 euros and Porsche Automobil Holdings SE declined 2% to 43.49 euros. BMW decreased 1.1% to 52.12 euros.

Deutsche Lufthansa AG increased 1 cent to 11.03 euros and Air France-KLM declined 1.3% to 6.27 euros.

Bayer AG declined 2.3% to 38.16 euros and BASF fell 0.2% to 46.13 euros.

Glencore, the Switzerland based commodities trader said it increased stake in South Africa based Optimum Coal to 25.8% from 24.7%. Glencore acquired 2.5 million shares at an average price of 37.99 rand a share, higher than the takeover price of 34 rand offered by the company controlled consortium.