ECB, BoE Hold Rates, Portugal Announces New Austerity Measures

Arthi Gupta
04 Oct, 2012
New York City

The European indexes traded mixed after the ECB and the BoE held rates. Spain raised

[R]2:30 PM Frankfurt – The European indexes traded mixed after the ECB and the BoE held rates. Spain raised €4 billion at higher rates. Portugal announced fresh austerity measures. UK home prices fell and German construction activity eased in September.[/R]

European indexes traded mixed after the central banks in Europe and UK left key rates unchanged near record lows as expected by markets. Portugal announced new austerity measures and Spain raised €3.99 billion from a bond auction today at higher yields.

The European Central Bank left its benchmark interest rate unchanged at a record low at 0.75% for the third consecutive month. The central bank also kept its deposit rate at zero and the marginal lending facility rate at 1.5%.

The Bank of England maintained the size of quantitative easing at £375 billion and the record low interest rate unchanged at 0.5%, as expected. The current rate is the lowest since the central bank was established in 1694.

The European Banking Authority said 27 banks have strengthened their capital position by €116 billion.

Portugal announced fresh austerity measures to rein its budget deficit for 2013 that includes lifting income taxes.

Finance Minister Vitor Gaspar said the tax measures, included an additional 4% surcharge on annual income next year. Another measure announced by the government is cutting the number of income tax brackets to five from eight.

The government aims to generate around €2 billion or $2.58 billion in additional revenue by combining the tax measures with a new solidarity tax of 2.5% for high earners.

The finance minister also reiterated that the Portuguese economy is estimated to contract 3% this year and 1% in 2013. The jobless rate is expected to surge to 16.4% in 2013 compared to an earlier forecast of 16%.

European authorities require that Portugal should bring the deficit to 2.5% of GDP in 2014.

However, popular discontent against new measures is likely to create more tensions for the government. Trade unions have called for a general strike on November 14 to protest against new austerity measures.

Separately, the finance ministry announced that Portugal returned to exchanging 39% of the debt into treasure obligations with maturity on September 2013 for October 2015 maturities.

The European Banking Authority disclosed that the EU-wide recapitalization exercise led to an increase of banks’ capital positions of more than €200 billion. The EBA said 27 banks with an initial shortfall that submitted capital plans have strengthened their capital position by €116 billion.

The EBA’s Board of Supervisors underlined the need for banks to maintain their capital levels in view of the implementation of the new regulatory framework.

In Paris trading, the CAC-40 Index gained 5.37 or 0.7% to 3,411.39 and in Frankfurt the DAX Index edged lower 3.28 to 7,318.72.

The yields on Spain’s benchmark 10-year rose five basis points to 5.86%. Italian 10-year yields were at 5.08%.

Spanish Bond Auction

Spain successfully raised €3.99 billion from a bond auction today meeting the upper end of the €3 billion to €4 billion target range.

The average yield on the new three-year benchmark debt rose to 3.956% from 3.845% at the prior auction on September 20. The bid-to-cover ratio increased to 2 from 1.56.

The average yield on securities maturing in October 2014 was at 3.282%. The bid-to-cover ratio increased to 2 from 1.9 at the last auction.

The average yield on securities maturing in July 2017 was 4.766%. The bid-to-cover ratio for 2017 bonds rose to 2.5 from 2.06.

UK Home Prices Drop

UK home prices declined 0.4% in September from a month ago, a survey by Lloyds Banking Group''s Halifax division showed today. This was the third consecutive monthly fall.

The average UK home price in September was 0.3% lower than in December 2011, at £159,486.

Prices in the three months to September were 1.2% lower than in the same period a year earlier.

Separately, new car registrations in the UK increased significantly in September, data released by the Society of Motor Manufacturers and Traders showed.

Overall new car sales increased 8.2% on an annual basis to 359,612 units in September.

German Construction Activity Eases

The total volume of construction activity in Germany decreased at a slower pace in September, a survey data from Markit Economics showed today.

The seasonally adjusted Construction Purchasing Managers'' Index rose to a five-month high of 48.6 in September from 47.8 last month.