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Eurozone crisis live: BoE and ECB leave interest rates unchanged

Bond yields fall for Spain and Italy
Bank of England holds interest rate and QE
ECB holds interest rate at 1%
UK industrial output falls
OECD warns of slowing growth in most of the industrialised world
• Fresh fears about Hungary and Slovenia
Today’s agenda
• Live blogging now: @RupertNeate

1.56pm: Draghi’s opening statement is now available on the ECB website. Here are his initial remarks:

The information that has become available since early December broadly confirms our previous assessment. Inflation is likely to stay above 2% for several months to come, before declining to below 2%. At the same time, the underlying pace of monetary expansion remains moderate. As expected, ongoing financial market tensions continue to dampen economic activity in the euro area, while, according to some recent survey indicators, there are tentative signs of a stabilisation in activity at low levels.

The economic outlook remains subject to high uncertainty and substantial downside risks. In such an environment, cost, wage and price pressures in the euro area should remain modest and inflation rates should develop in line with price stability over the policy-relevant horizon.

The provision of liquidity and the allotment modes for refinancing operations will continue to support euro area banks, and thus the financing of the real economy. The extensive recourse to the first three-year refinancing operation indicates that our non-standard policy measures are providing a substantial contribution to improving the funding situation of banks, thereby supporting financing conditions and confidence. In addition, we are actively working towards the implementation of all the measures announced at our December meeting, which should provide additional support to the economy. As stated on previous occasions, all the non-standard monetary policy measures are temporary in nature.

1.47pm: Draghi has now turned to defending the effectiveness of the ECB’s landmark three-year loans, half a trillion euros of which were offered to eurozone lenders in December.

He says he is seeing more signs the operation was successful as time passes and that it prevented would could have been major constraints on lending.

As for reports that banks are merely parking the money back with the ECB, Draghi also seeks to set the record straight. He says that by and large the banks that have taken three-year loans are not the same ones as those depositing at the ECB.

1.45pm: Draghi is now taking questions from the media. In answer to the first question he says today’s interest rate decision – rates were left at 1% – was unanimous.

1.40pm: On the downside risks to growth, which Draghi characterises as “substantial”, he says they stem primarily from the debt crisis, weaker than expected global growth and protectionism.

Turning to banks, he demands that moves to improve their finances do not hurt lending to the economy.

On governments, Draghi asks they stick to “correcting excessive deficits in accordance with agreed timetables” and do so “rigourously” to bolster confidence across the eurozone.

1.38pm: Katie Allen here taking over from Rupert Neate for a short while to bring you highlights of Mario Draghi’s ECB press conference.

Draghi has started off by flagging up substantial downside risks to the economic outlook for the eurozone and high uncertainty around the outlook. He says that inflation will stay above 2% for several months before declining. He adds that ongoing financial market tensions contune to dampen economic acttivity in the euro area although he does note “tentative signs” of stabilisation in activity at low levels.

He says the central bank expects the euro area economy to recover, albeit very gradually, in the course of this year.

As for the ECB’s support for the economy, he stresses all non-standard ECB measures are temporary.

1.29pm: Time for a lunchtime round up:

Both the ECB and Bank of England kept interest rates on hold

Spanish and Italian bond yields fell

UK industrial output fell in November

The OECD warned of slowing growth in most of the industrialised world

Katie Allen is talking the helm now to guide you through Draghi’s press conference.

My colleague Jill Treanor has sported a potentially worrying announcement from Clydesdale Bank.

Clydesdale, which has 347 branches across the UK, shows that its parent, National Australia Bank has pumped another £400 m (approximately A0 million) into the operation. The last reported tier 1 capital ratio – the key measure regulators use to measure financial strength – was 9.8%. Clydesdale said the extra capital raised its ratios by 1.4 percentage points and it does not
appear to have been forced upon the bank by any regulators. David Thorburn, chief executive of Clydesdale and Yorkshire, said: “This capital increase continues our focus on maintaining a conservative level of liquidity and strong capital ratios.”

1.13pm: Gold is climbing towards ,660 an ounce after the ECB hedl rates and the well-received Spanish and Italian bond auction.
Spot gold was up 1% at ,656.89 an ounce at 12:51pm, having earlier touched a one-month high at ,657.60. U.S. gold futures for February delivery were up .00 an ounce at ,657.60.
LGT Capital Management analyst Bayram Dincer said gold prices woudl be boosted further if ECB president Draghi gives a “slightly more dovish statement regarding long-term operation rates and bond buying, new liquidity measures” at 1.30pm

1.04pm: European Commission President Jose Manuel Barroso has said the European Union executive will use its authority to ensure Hungary complies with the bloc’s laws.
It comes after Hungary brought in new rules that limit the independence of the county’s central bank.

We will use all our powers to make sure Hungary complies with the principle and values of the EU. I’m confident we will achieve that.

12.47pm: Alex Lawson, financial risk manager at Moneycorp, said:

Today’s decision took few by surprise as February’s meeting looks the more likely date for any expansion to the quantitative easing programme. By that time, the Bank will have seen the latest quarterly forecast for inflation and the first estimate of the pace of economic growth in the fourth quarter of 2011, allowing them to make a more informed decision. An expansion to QE has probably already been largely priced into the pound which may limit the effect of any announcement next month; in the meantime, sterling is likely to make further tests of support at .5270 against the US dollar and consolidate recent gains versus the euro while the markets wait for economic data to give them direction.

12.45pm: The ECB has kept rates unchanged at 1%.

Mario Draghi, ECB President, will provide more details and explain the governing council’s decision at 1:30pm. Until then, there’s an extensive press release on the ECB’s website.

12.01pm: No change. The Bank of England has held interest rates at the record-low of 0.5% and QE at £275m.

Ian McCafferty, chief economic adviser to the CBI, said:

Today’s decision by the MPC to leave monetary policy unchanged was expected, since the current round of asset purchases is not yet complete.
“But with economic conditions fragile and inflation expected to undershoot, the MPC appears to be signalling that a further extension of the asset purchase programme is likely in the months ahead.

11.38am: You couldn’t make it up. The next EU27 heads of state government meeting to discuss measures to promote growth and employment has had to be rescheduled because… of (another) general strike in Brussels.
It will now be held on Sunday 29 Jan, rather than Monday 30.
(thanks to Citi for the heads up)

11.25am: Another recession alert. The OECD has warned that it expects growth to slow in most of the industrialised world.

It said its monthly indicator pointed to more slowing in the OECD area, the 17-nation euro area and the top five Asian economies as a whole, although it showed hints of a turn for the better in Japan, the United States and Russia.

The OECD’s leading indicator for the UK fell for a 9th successive month.
Within the euro zone, where the index dipped to 98.3 from 98.7, one of the more significant drops was in Germany, down 0.8 points at 97.9, slipping further from the long-term average.
China dipped 0.1 points to 100.0, while an Asian aggregate grouping the five economies of China, India, Indonesia, Japan and South Korea dipped 0.2 points to 98.9.

Howard Archer, chief UK & European economist, said:

A further drop in the OECD leading indictor for the UK in November maintains serious concerns that the economy is headed back into recession. The only crumb of comfort from the OECD indicator was that the rate of decline moderated in November to the slowest level since May. In our recently completed January forecast, we projected UK GDP growth to be limited to just 0.3% in 2012 following estimated expansion of 0.9% in 2011. We believe that the economy was essentially flat in the fourth quarter of 2011 and suspect that it will contract modestly in the early months of 2012. We expect the economy to stabilize towards midyear and then see gradual growth getting underway from the third quarter. The situation in the Eurozone continues to post serious downside risks to this forecast.

11.13am: Following the success of Spain and Italy’s bond auction, Ireland (which has been shut out of the international markets since accepting a IMF/EU bailout in 2010) is hoping to make a “tentative return” to the bond markets some time next year, its PM Edna Kenny said in London.

10.23am: Buona notizia. Italy got its bonds away at half the interest rate it was paying last year.

The yield on Italian 12-month bills fell to 2.735%, from the near-6% yield Italy paid to sell one-year paper at a mid-December auction. It’s the lowest since June 2011.

Italy sold €8.5bn of 12-month BOT bills and €3.5bn of bills maturing at the end of May. The 12-month sale was covered 1.5 times, versus a bid-to-cover ratio of 1.9 at the slightly smaller sale in mid-December.

The 10-year yield spread between Italian and German bonds fell below 500 basis points for the first time this year.

10.13 am: Tesco’s share price has now dropped 14.4%, and dragged Morrison down 7% and Sainsbury 4.4%).

Read Nils Pratley on Tesco’s troubles.

In the style of a celebrity shoplifter, Tesco’s management confessed this morning to “long-standing issues”. Philip Clarke, new-boy chief executive, let it all spill out. “We’ve driven productivity a bit too hard. We’ve run hot too long,” he said. On fresh food, “we’ve been chasing our tail.” He wouldn’t want to describe big out-of-town hypermarkets as “a white elephant” but they are a “less potent force” and “we wouldn’t want a great many more of them.”

Meanwhile RBS is the biggest riser (+7%) after axing 3,500 jobs in its investment banking arm.

10.00am: Results from Spain’s bond auctions are in. The government managed to get the sales away at lower yields than last time (better value-for-money for the taxpayer). The average yield on April 2016 was 3.748% down significantly from 4.971% last time in July 2011.
Overall it raised €10bn form the auction of three bonds.

9.47am: Philip Shaw, Investec’s chief economist, on UK production numbers:

The manufacturing numbers aren’t far from expectations, but what may be interesting is the continued weakness in industrial production. With services seemingly having got off to a very poor start in Q4, today’s release heightens the risk that the UK economy contracted in the final quarter of the year.

We’ve been suggesting that the UK will be in recession at the start of this year, but it may have started even earlier.

A relatively mild couple of months has resulted in softer utilities output. It’s also true that there’s a chunky fall in oil and gas extraction, and you could say those elements are unrelated to the state of fundamental demand in the economy.

Nonetheless, there isn’t very much that’s performing well in the UK economy.

9.39am: British industrial output posted a surprise 0.6% fall in November raising the prospect that the overall economy contracted in the final quarter of 2011.

The 0.6% fall reported by the Office for National Statistics (ONS) comes against analysts’ forecasts for an unchanged reading. Year-on-year it’s down 3.1%.

The ONS said the fall was driven by a decline in oil and gas extraction, and lower electricity production caused by unusually warm weather in November.
UK manufacturing production was down 0.2% month-on-month, 0.6% year-on-year.

9.23am: Italy’s PM Mario Monti has said he hopes for swift agreement on a European Union treaty to tighten budget controls so that the bloc can focus its energy on measures to stimulate economic growth.

Europe is not only about budget discipline. It is very important to move beyond this and to invest constructive political energy in growth.

We have to exploit the full potential of an integrated continent to grow more. And this has not been done up until now. It has not been done by the European institutions or by the biggest member states.

Italy, which has debt in excess of 110% of GDP at unaffordable interest rates, has been lobbying against tougher treatment of heavily indebted countries.

Monti also said the ECB may become “more relaxed” after a deal is reached on the fiscal pact.

We’ll see the results of Italy’s latest bond auction at 10am.

9.18am: Sterling has hit a three-month low against the dollar as investor fret about UK industrial output data due out at 9:28am.

Sterling fell to a low of .5279, very close to the 2011 low of .5270, below which would mark its lowest since late July 2010. Traders cited selling by a UK clearer and said the pound extended falls after dropping below stop loss orders around .5300.

“Sterling had been performing fairly well recently and it has come off, which is likely to reflect position adjustment ahead of today’s central bank meetings,” said Geraldine Concagh, economist at AIB Group Treasury in Dublin. “But the trend is still lower for euro/sterling and any upward momentum is likely to be sold into.”

The pound also fell against the euro as the single currency benefited from investors trimming hefty short positions. However, the euro remained vulnerable, with sterling staying not far from a 16-month high.

The euro was up 0.3% against the pound at 83.15p, pulling away from its recent low of 82.22p.

9.01am: Inflation in Germany jumped 2.3% over 2011 – its highest for three years and above ECB targets, according to the latest official data.

Soaring energy prices account for much of the rise in consumer prices index for the eurozone’s largest economy. The 2.3% rise compares to a 1.1% increase in 2010 and 0.4% in 2009.

The ECB aims to keep inflation in the 17-nation euro area below 2%. But inflation in Germany exceeded that level in every month last year, the national statistics office Destatis said.

8.54am: The ECB says whopping €470bn was deposited with them overnight as banks favour using the ECB as a safe haven for excess cash (even though rates are very low) rather than lend it out to other banks.

Overnight deposits have been at unusually high since August 2011, and hit several record highs in recent weeks.

€3.2bn was borrowed from the ECB overnight.

8.40am: Could Tesco’s disastrous results herald the beginning of the end of the hanger-sized out-of-town superstore? Very possibly, according to Tesco bosses, who on a call with analysts, said “we wouldn’t call them white elephants … but I’m not sure we’d want too many more of them”.

8.18am: Meanwhile, the disaster on the British high street continued this morning with Tesco reporting its worst sales performance in decades. The shares are down a stonking 10% – wiping €3bn off its market value.

Tesco has delivers its worst Christmas sales performance in decades despite a high profile £500m price cuts campaign to attract shoppers back to its stores.

Its chief executive Philip Clarke admitted he was “disappointed” with the group’s performance which is the weakest of the four major supermarket chains over the important trading period. Analysts had predicted a 0.8% drop in underlying sales for the six weeks to 7 January but like-for-like sales excluding VAT and petrol, dropped 2.3%.”

James Hall, consumer affairs editor at the Telegraph, tweeted

Bad times at Tesco. Love it or hate it, but when that beast has falling sales you know the economy’s dire.

Tesco’s disaster has dragged down Morrisons (-5%), Sainsbury’s (4.3%) and M&S (-2%).

There were also dire Christmas sales at Home Retail Group (owner of Argos and Homebase), Thorntons and Jeweller to the stars Theo Fennell warned that sales are tumbling and it’s likely to make a full-year loss.

8.17am: Here’s today’s agenda:

• 9:30am (all times GMT): A key Spanish bond auction. Spain is offering €4–5bn in 2015-16 bonds in its first auction of 2012.

• 10:00am: Italy, which needs to repay more than €50bn in bonds in the first quarter, will sell as much as €12bn bonds today and €4.75bn tomorrow.

• 12:00pm: The Bank of England’s interest rate and quantative easing decision (rates are expected to be kept at their record low of 0.5% and QE is likely to be held at £275bn).

• 12:45pm: The European Central Bank (ECB) makes its decision on rates and QE (no change expected).

• 13:30pm Investors will get their first glimpse of the ECB’s 2012 strategy as President Mario Draghi chairs a policy-setting meeting of the Governing Council.

• 13:30: US retail sales for December (which are expected to rise just 0.3%).

7.25am: Here’s a nice little primer for the day ahead courtesy of Michael Hewson at CMC Markets.

Throughout most of fourth quarter UK PMI data has always seemed to flatter to deceive when it comes to the UK manufacturing and industrial production data which has been less than convincing. This morning’s release of November data is not expected to be any different with expectations fairly low on both the monthly and the annualised measures.

Industrial production is expected to slip 2.2% annually, but improve from October’s 0.7% slide to post a figure of -0.1%.

Manufacturing production is also expected to similarly improve on the monthly measure from -0.7% in October to -0.2%, while the annualised measure is expected to slide from positive to negative territory of -0.5%.

If the numbers are even worse than predicted it will certainly increase the pressure on the Bank of England to look at further easing measures in the coming months.

Today’s rate decision will probably be too soon for the MPC to consider such measures in the short term, given recent comments from various policymakers about not wanting to pre-commit to further easing in light of the uncertainty in Europe.The likely outcome will be a “hold” on rates and a “hold” on the current £275bn of asset purchases.

7.21am: Good morning and welcome back to another day of rolling coverage of the European debt crisis. We’re expecting quite an action-packed day with bond auctions in Spain and Italy and interest rate and QE decisions from the Bank of England and the ECB (no change expected). There’s also a slew of UK, European and US manufacturing and sales data due out. Analysts expect UK industrial production to have slipped 2.2% in November compared to a year earlier.

On top of that there’s renewed concern that Hungary’s problems may have spread to neighbouring Slovenia.

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