Regions

[Muthukali]

Vietnam lowers key rates as growth holds below 5 pct this quarter

Vietnam cut interest rates for a fifth time this year to spur growth after a report on Friday showed economic expansion stayed below 5 percent this quarter.

The State Bank of Vietnam lowered the refinance rate to 10 percent from 11 percent and the discount rate to 8 percent from 9 percent, it said in a statement on its website Friday, with the cuts effective July 1. Gross domestic product rose 4.66 percent in the three months ending June from a year earlier, after climbing 4 percent in the first quarter, the General Statistics Office said.

Vietnam has struggled with stagnant bank lending and high inflation that crimped corporate growth and domestic demand, with Europe’s debt crisis and China’s economic slowdown also posing risks. The government reduced its target for GDP growth of as much as 6.5 percent in 2012 to 6 percent, and Do Thuc, general director of the statistics office, said Friday full- year expansion may be 5.4 percent to 5.7 percent.

“While we expected another interest-rate cut this year, this cut comes a little earlier than we expected,” said Louis Taylor, chief executive officer for Standard Chartered Plc in Vietnam, Laos and Cambodia. In the context of the GDP number, “the cut is less surprising. With inflation having fallen further, there is still an argument that real interest rates are higher today than they were three months ago,” he said.

The benchmark VN Index rose 1 percent on Friday, the most in two weeks, while the Vietnamese dong strengthened 0.1 percent to 20,878 per dollar, according to prices from banks compiled by Bloomberg.

State spending
The Southeast Asian nation has entered a period of sluggish growth, the World Bank said in a report this month that cited the slow pace of structural reforms and inefficiencies in state- owned companies, banks and public investments.

The government will accelerate state spending and boost bank lending to bolster the economy, Deputy Prime Minister Nguyen Xuan Phuc told the National Assembly on June 15. It also plans to cut some corporate taxes, defer sales tax payments and lower lending rates for some companies, he said.

Consumer prices rose 6.9 percent this month, compared with a rate of 23.02 percent in August 2011.

“We are encouraged the government is showing itself willing again to provide whatever solutions are necessary to get the economy moving,” Kevin Snowball, the Ho Chi Minh City-based chief executive of PXP Vietnam Asset Management, wrote in a note this month, citing the creation of a fund to get non-performing loans off the balance sheets of banks and revive lending.

Vietnamese banks’ outstanding loans fell 0.59 percent from the end of 2011 through April, the central bank said on June 21.

Boost lending
The rate cut on Friday “means the central bank really wants lenders to boost lending to help businesses and bolster the economy,” said Phan Thi Chinh, deputy chief executive officer at the Bank for Investment and Development of Vietnam.

The economy expanded 4.38 percent in the first half of the year, down from 5.63 percent a year earlier. Vietnam was hit by many difficulties in 2010 and 2011, and conditions “became even more difficult in the first half of this year,” Thuc said in a briefing in Hanoi on Friday.

Industry and construction, which accounted for 40 percent of gross domestic product in the first half of the year, grew 3.81 percent in that period. The sub-category comprising only construction slipped 0.8 percent, the Statistics Office said.

Agriculture, forestry and fisheries, which made up 22 percent of gross domestic product, expanded 2.81 percent in the first half. Services, which made up 38 percent of the economy, grew 5.57 percent in the first half. The number of foreign visitors rose 14 percent in that period.

Emirates, the world’s biggest airline by international passenger traffic, began daily flights this month between Dubai and Ho Chi Minh City, and said it will raise capacity on the route in October.

 

[Muthukali]

ISM Index of U.S. Manufacturing Decreased to 49.7 in June

The Institute for Supply Management’s factory index fell to 49.7 in June from 53.5 a month earlier, the Tempe, Arizona-based group’s report showed today.

Readings less than 50 signal contraction, and the median forecast of economists surveyed by Bloomberg News called for a decline to 52. Estimates of the 70 economists ranged from 50.5 to 53.5. The gauge averaged 55.2 in 2011 and 57.3 in the previous year.

Manufacturing is weaker in the rest of the world. The industry in the euro-area contracted for an 11th straight month in June as Europe’s debt crisis sapped demand. A measure of the region’s factories held at 45.1, London-based Markit Economics said.

Euro-area unemployment reached the highest on record in May, other figures showed. The jobless rate in the 17-nation area rose to 11.1 percent, the highest since the data series began in 1995, from 11 percent a month earlier, the European Union’s statistics office in Luxembourg said.

A manufacturing purchasing managers’ index for China fell to 48.2 in June from 48.4 a month earlier, HSBC Holdings Plc and Markit said today.

 

[Muthukali]

Microsoft Writing Down $6.2 Billion After AQuantive Sputters

Microsoft Corp. (MSFT) is taking a $6.2 billion writedown for almost the entire amount it paid for Internet-advertising company AQuantive Inc., signaling that its online division will perform worse than the company projected.

The non-cash charge means the company will probably post a loss for the quarter, which ended in June. Before the statement, analysts had predicted that Microsoft would report profit of $5.3 billion in the period, data compiled by Bloomberg show.

Microsoft bought AQuantive for about $6.3 billion in 2007 to catch Google Inc., amid an acquisition spree for companies that specialize in online advertising. The deal failed to accelerate growth as much as anticipated at the company’s money- losing online division, Microsoft said. The company won’t reverse losses as quickly as it intended, said a person with knowledge of the matter, who’s not authorized to speak publicly.

“Online services is the biggest drag on the company right now,” said Colin Gillis, an analyst at BGC Partners LP in New York, who has a buy recommendation on Microsoft.

Even as the AQuantive deal didn’t meet projections, Microsoft said its online division has shown improvement in other areas, including revenue per search and market share gains for the Bing search engine.

Operating losses in online services narrowed to $1.45 billion in the nine months through March 31, from $1.91 billion a year earlier, Microsoft said in April. Sales gained 11 percent to $2.13 billion in the period.

‘Slow Improvement’
“It’s the classic come-from-behind, slow, incremental improvement,” Gillis said. “Bing has made incremental gains.”

Microsoft agreed to buy AQuantive weeks after Google said it would acquire DoubleClick Inc., which also handles online advertising.

The company had to take the writedown because the online business isn’t growing as quickly as forecast, and it’s taking longer to turn around than Microsoft expected, said the person. The company hasn’t boosted revenue per search as much as it had projected. What’s more, distribution deals in which Microsoft pays companies like Dell Inc. (DELL) and Verizon Wireless have added customers -- though at a high cost, the person said.

“This is an accounting decision that the company made based on how the business is performing relative to the projections we had made during the past five years,” Microsoft Chief Executive Officer Steve Ballmer and online unit President Qi Lu, wrote in an e-mail to employees obtained by Bloomberg.

“We want to be very clear that we are strongly committed to a strong and financially successful” online division, according to the memo, whose authenticity was confirmed by Microsoft.

Microsoft was little changed at $30.56 at the close today in New York. It has climbed 18 percent this year.

 

[Muthukali]

Inflation tame in June - Thailand

Consumer prices in June were up 2.56% year-on-year as the prices of food and energy remained weak, according to the Commerce Ministry.

The ministry now estimates that inflation this year will come in at about 3.5%, still falling within the projected range of 3.2% to 3.8%, as the global economy slows and energy prices fall.

Yanyong Phuangrach, permanent secretary of the Commerce Ministry, said the consumer price index in June stood at 115.42 points, a 0.16% rise from May.

The consumer price index was up 2.53% in May year-on-year.

The inflation rate in the first half of the year was 2.95%, slightly lower than the projected 3%. The ministry expects the inflation rate in the third quarter will stay under 3.3%.

The core consumer price index, which removes food and energy, was 108.31 points in June, up 1.92% year-on-year and up 0.15% from May.

For the six-month period, the core inflation rate was 2.37%, in line with the the target range of 0.5-3% set by the Bank of Thailand.

Regarding criticism on the failure to successfully implement the policy of controlling prices of seven cooked foods at 30-35 baht in 38 provinces, Mr Yanyong said food prices in food courts and department stores have been softening in line with the lower prices of fresh ingredients.

He said the policy was necessary as cooked foods are weighted at 20% in the calculation of the consumer price index.

The consumer confidence index in June was at 27.6 points and has been increasing for the past three months as petrol prices fall.

The future consumer confidence index was down from 33.5 points in May to 32.1 in June because of worries about the euro-zone debt crisis, decreased construction, the tourism low season and possible flooding.

 

[Muthukali]

Sacombank Securities suspected of misleading sharehholders as losses mount

Sacombank Securities JSC, one of Vietnam’s five largest brokerages, has been accused of hiding losses over the past few years, leading to a huge cumulative loss of VND1.4 trillion (US$68.4 million) as of the end of March.

The Ho Chi Minh City-based company, known as SBS, surprised the market at the end of 2010 with a profit or more than VND101.2 billion, paying a dividend of 6 percent to its shareholders despite the poor performance of the stock market as a whole.

But now, amidst a recovery of the stock market, with the benchmark VN-Index one of Asia’s best performers, it has posted the biggest loss among the 700 listed companies in Vietnam. The cumulative figure included losses of nearly VND800 billion made in the first quarter. That compared to its registered capital of VND1.2 trillion.

SBS shares have fallen sharply from VND34,000 at the end of 2010 to VND3,900 last Friday, which translates to a 90 percent loss for shareholders.

Its officials have said that the company faced many difficulties last year as the market declined while operational costs increased. According to news website VnExpress, Sacombank cut its ownership at SBS to 11 percent last year from 56.4 percent.

Analysts, however, said it was unusual for a company to post huge losses in a short time, putting shareholders at the risk of losing all their money.

Economist Dinh The Hien said if the management board of a company tried to cover up losses on purpose, it would be very difficult spot. Companies can do so by simply reducing financial reserves or selling their assets to increase their cash inflows and then making repurchases later.

Lawyer Tran Minh Hai said SBS shareholders can file a lawsuit and seek compensation if the company does not come up with resonable explanations.

Responding to the accsuations, SBS announced Friday that it has hired Ernst & Young to undertake an audit. Results are expected to be announced in two months.

 

[Muthukali]

Diamond Quits as Pressure Mounts on Barclays Over Libor

Robert Diamond, the architect of Barclays Plc (BARC)’s investment banking expansion, stepped down as chief executive officer, succumbing to political pressure to go after the bank admitted to rigging global interest rates.

Diamond, 60, will step down with immediate effect, the London-based bank said in a statement today. Diamond became CEO of Barclays on Jan. 1, 2011 after joining the bank in 1996. Marcus Agius, who said yesterday he would step down, will become full-time chairman and lead the search for a new CEO.

“I am deeply disappointed that the impression created by the events announced last week about what Barclays and its people stand for could not be further from the truth,” Diamond said in the statement.

Diamond had yesterday defied pressure to quit, pledging to implement the findings of a review into how the bank sets the London interbank offered rate. Barclays was hit by a record 290 million-pound ($455 million) fine last month for rigging the benchmark. He and Agius are the most senior bankers to announce their departures so far following probes by global regulators.

“There comes a point in time when the board says enough is enough and it became very personal in terms of the criticism,” said Christopher Wheeler, a London-based banking analyst at Mediobanca SpA. “It allows the bank to draw a line. The priority now is to find an appropriate chief executive who has not been affected by all this.”

‘Unacceptable Face’
Diamond joined Barclays in 1996 and ran the London-based bank’s securities unit during which the Libor manipulation occurred. He lost the contest for the CEO post to John Varley in 2003 and became president of the bank in 2005. He stayed, and by 2007, his Barclays Capital unit accounted for 31 percent of pretax profit. Varley stepped down in 2010, clearing the way for Diamond to replace him.

Diamond became the public face of both the company and the industry, being branded the “unacceptable face of banking,” by the-then Business Secretary Peter Mandelson in 2010 over his compensation. His 12 million-pound remuneration, including a 5.75 million-pound payment toward his personal tax bill last year, made him Britain’s top-paid bank CEO. In January 2011 he told Parliamentarians that the time for “remorse and apology” for banks needed to be over, prompting political outcry.

PPI, Swaps
His tenure as CEO has been marred by disputes with regulators, some of which he inherited from his predecessors: the first was over the mis-selling of payment-protection insurance to customers, the second over tax-avoidance plans the Treasury described as “abusive,” and the third over improper sales of derivatives to customers. At the same time, Diamond regularly called on banks to be more “effective citizens.”

His departure may stoke speculation the lender may divide its consumer and investment banking operations.

“The problem is the bank is so big,” said John Smith, a senior fund manager at Brown Shipley & Co., which manages 2.3 billion pounds including Barclays shares. “It’s getting beyond making money for themselves, you’re taking risks with the U.K. economy, people’s savings, and not just shareholders’ capital.”

 

[Muthukali]

Time to promote foreign investment

Thailand’s capital market has strong growth potential while public debt is relatively low and therefore it is the right time to invite foreign investors to put more into Thailand, Paiboon Narintarangkul, chairman of the Federation of Thai Capital Market Organisations, said on Tuesday.

The federation at the beginning of the year had forecast that about US$3 billion would flow into Thailand in 2012.

However, foreign direct investment inflow would be more than that because of continuing economic growth and the government’s policy to stimulate domestic consumption, which has boosted the price to earnings ratio of consumer products companies to 25, said Mr Paiboon.

If the political scene is stabilised in the second half of the year, foreign direct investment will continue to flow in, he added.

He suggested the government take this opportunity to raise funds for financing its infrastructure development projects through the Thai capital market and to help manufacturers look for new export markets to replace the troubled countries in Europe.

Moreover, in order to maintain public debt at suitable level, the government should reduce its holdings in state enterprises and allow investors to hold shares in state firms, he said.

Mr Paiboon said the federation had discussions with the Securities Exchange Commission and it was agreed that projects must be set up to get the industry sector ready for the debut of Asean Economic Community in 2015.

 

[Muthukali]

Stocks Rally With Commodities as Treasuries Retreat

Stocks rose, sending U.S. and European benchmark indexes to two-month highs, and commodities rallied as American factory orders topped estimates and speculation grew central banks will act to spur growth.

The Standard & Poor’s 500 Index advanced 0.6 percent to close at 1,374.02 while the Stoxx Europe 600 (SXXP) Index added 1 percent, with both above their highest closes since the first week of May. Oil jumped 4.7 percent and corn climbed for a third day as 22 of 24 commodities tracked by the S&P GSCI Index advanced. The yen fell against 15 of its 16 major peers, while 10-year U.S. Treasury notes retreated.

U.S. equities extended gains as government data showed factory orders rose in May for the first time in three months, easing concern that manufacturing is faltering. The European Central Bank is forecast by economists to cut interest rates this week, while a state-owned newspaper in China said the time is ripe for a reduction in banks’ reserve-requirement ratios. Employment figures in the U.S. this week may prompt the Federal Reserve to initiate fresh stimulus, BNP Paribas SA said.

“The factory orders data take the edge off the bad numbers,” John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York, said in a telephone interview. His firm oversees $201 billion. “There’s the notion that the Federal Reserve will do whatever it has to do. The question is - - will the Fed let us slip into a recession? The answer is no.”

Early Close
Trading on U.S. stock markets ended at 1 p.m. today in New York and Treasuries closed at 2 p.m., with exchanges shut tomorrow for the Fourth of July holiday.

Commodity producers, industrial and technology companies rose at least 0.9 percent to lead gains in six of the 10 main industry groups in the S&P 500. (SPXL1) Canada’s S&P/TSX Composite Index surged 2.2 percent, its biggest advance since November, as energy and metal producers rallied.

General Motors Co., Ford Motor Co. and Chrysler Group LLC reported U.S. auto sales for June that topped analysts’ estimates, helping the industry surpass projections and stay on pace for the best year since 2007. U.S. auto sales accelerated to a 14.1 million seasonally adjusted annualized rate, researcher Autodata Corp. said in an e-mailed statement.

Alcoa Inc., Caterpillar Inc. and Chevron Corp. (CVX) rose more than 1.4 percent to help lead gains in the Dow Jones Industrial Average. Ford Motor Co. rallied 2.2 percent as deliveries of cars and light trucks beat estimates.

Treasury Yields
The yield on the 10-year U.S. Treasury note rose four basis points to 1.63 percent. A benchmark gauge of U.S. corporate debt risk was poised to fall to the lowest level in almost two months. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark, decreased 2.7 basis points to a mid-price of 106.5 basis points.

The Stoxx 600 rallied to the highest level since May 3 as four shares increased for every one that fell. The regional benchmark has climbed 5.2 percent in three days after European leaders agreed on plans to tame the region’s debt crisis. PSA Peugeot Citroen climbed 3.7 percent after a union official said the company plans to cut its French workforce by as much as 10 percent this year.

Barclays Plc slipped 0.8 percent, erasing an early rally of as much as 4.8 percent. Chief Executive Officer Robert Diamond succumbed to political pressure to quit after the bank admitted to rigging global interest rates.

Yen, Aussie
The yen weakened 0.7 percent against the euro and 0.4 percent versus the dollar. Australia’s dollar appreciated 0.8 percent versus the yen after data showed building approvals surged by a record and the central bank left interest rates unchanged.

The S&P GSCI gauge of 24 commodities climbed 3.5 percent to the highest since May. Oil rose to a one-month high of $87.66 a barrel, corn gained 2.9 percent and copper jumped 2.5 percent. Aluminum advanced 3.8 percent after Goldman Sachs Group Inc. said the metal is “attractive at these levels.”

The MSCI Emerging Markets Index (MXEF) advanced 1.7 percent to the highest level on a closing basis since May 11. The Hang Seng China Enterprises Index (HSCEI) added 1.4 percent as trading resumed after a yesterday’s holiday. Cutting reserve requirements may become the top choice for the People’s Bank of China to increase liquidity, according to the China Securities Journal, which is published by the official Xinhua News Agency.

Russia’s Micex Index advanced 2.5 percent. Turkey’s ISE National 100 Index (XU100) jumped 1.2 percent after the inflation rate rose less than analysts estimated.

 

[Muthukali]

Temasek’s China Bank Gains Offset by Euro Crisis: Southeast Asia

Temasek Holdings Pte’s sale of Chinese bank shares probably helped Singapore’s state-owned investment company weather losses from the European debt crisis in the past year.

The company sold shares in China Construction Bank Corp. (939) and Bank of China Ltd. in the year ended March, profiting from stakes held since their initial stock sales. Temasek, whose assets rose 3.8 percent to a record S$193 billion ($153 billion) as of March 2011, usually releases its annual report in July.

Temasek probably struggled to boost its total shareholder return beyond the 4.6 percent in the previous year as Europe’s turmoil and the lackluster U.S. economic recovery roiled markets, said Melvyn Teo, director of BNP Paribas Hedge Fund Centre at the Singapore Management University. Market volatility reached the highest level since the 2008-2009 global financial crisis, pushing the MSCI Asia-Pacific excluding Japan Index 9.6 percent lower in the year ended March for a region where Temasek has about three-quarters of its assets.

“Returns won’t be earth-shattering,” Teo said. “The long-only guys are having a tough time because the equity markets haven’t been doing well. It was a year focused on downside risk and people were getting more risk averse.”

Temasek’s total shareholder return, which includes changes in the value of its assets and dividends, averaged 17 percent since its inception in 1974, according to its website. The company had a negative shareholder return of 30 percent in the year ended March 2009, then posted a 42 percent increase the following year.

Rivaling 2008
Chief Investment Officer Tan Chong Lee said in a June 11 interview the turmoil in Europe may result in a market slump rivaling the 2008 global financial crisis. The company also expects smaller returns for the asset management industry on anticipation the outlook will be difficult for years, Gregory Curl, its president and head of the Americas, said in a speech in Hong Kong on June 21.

“That was managing expectations,” said Victoria Barbary, senior researcher at the sovereign investment lab at Milan’s Bocconi University, referring to Curl’s comments. “Temasek has been pretty clear that they expect returns to be lower,” she said in a phone interview from London.

Curl, once a candidate for chief executive officer of Bank of America Corp. (BAC), is one of Temasek’s four presidents. The company named Lee Theng Kiat, head of its Singapore Technologies Telemedia Pte unit, as president and general counsel on April 1. Boon Sim, former global head of mergers and acquisitions at Credit Suisse Group AG, joined as president for North America on June 1. In January, it hired John Cryan, the former chief financial officer of UBS AG, as president for Europe.

Management Changes
The state investor has faced changes at the top since the middle of 2009, when it parted ways with former BHP Billiton Ltd. head Charles “Chip” Goodyear, who was going to replace Ho Ching as CEO over differences in strategy. Simon Israel, also a former Temasek executive director and president, retired from his executive and board roles in July 2011, while former President Hsieh Fu Hua stepped down in October.

Temasek is ranked ninth among sovereign investors by the SWF Institute, trailing behind funds including those in the United Arab Emirates, Norway and China. The U.S. researcher estimates Temasek’s assets at $157.2 billion.

Temasek’s returns compare with mixed performances among the world’s biggest companies with investments in various industries. Shares of General Electric Co. gained 0.1 percent in the year ended March, while Berkshire Hathaway Inc. (BRK/A), controlled by Warren Buffett, the world’s third-richest man, fell 2.7 percent. In Asia, Hong Kong billionaire Li Ka-shing’s Hutchison Whampoa Ltd. (13), with investments in ports to real estate, slumped 16 percent.

Overseas Holdings
Some of the biggest declines probably came from Temasek’s overseas holdings, which range from consumer products to energy companies. Hong Kong-based Li & Fung Ltd. (494), the world’s largest supplier of clothes and toys to retailers, lost 11 percent in the year ended March, while Chesapeake Energy Corp., the second- largest U.S. gas producer, plunged 31 percent.

Barbary said she doesn’t expect Temasek to book any losses when it releases its annual report. It raised $3.63 billion selling stakes in the two Chinese banks in July 2011, after shares of Construction Bank more than doubled and those of Bank of China gained more than 30 percent since their initial stock offerings more than five years before the transactions.

About two months later, Temasek paid $37 million for more shares in Bank of China and $2.8 billion for Construction Bank stock. That was followed by a further $2.2 billion purchase of Construction Bank shares in November, based on Bloomberg calculations.

‘Portfolio Rebalancing’
Temasek said the buying and selling of the banking stakes reflect its “portfolio rebalancing.” After the fiscal year, the company sold $2.48 billion in Construction Bank and Bank of China in May, less than a month after paying $2.3 billion for shares in Industrial & Commercial Bank of China (601398) Ltd., the world’s largest lender by market value.

“Although they have several high-profile trades that have netted them handsome returns, in terms of emerging markets, it’s been a difficult period,” said Song Seng Wun, an economist at CIMB Research Pte, a unit of Malaysia’s second-largest bank. “Overall, one side may net off the other and it might just be flat numbers.”

Singapore Assets
In Singapore, where Temasek has 32 percent of its assets, the benchmark Straits Times Index (FSSTI) declined 3.1 percent in the year ended March. The firm holds controlling stakes in half of the 10 biggest companies by market value, including DBS Group Holdings Ltd. (DBS) and Singapore Telecommunications Ltd. (ST) The phone company, Southeast Asia’s biggest, was the only one among the five that posted gains in the past fiscal year.

Temasek is also embarking on its biggest transaction in more than a decade, selling its 67 percent stake in PT Bank Danamon Indonesia (BDMN) to DBS. The Singapore bank proposed in April to pay for the holdings with about $4.8 billion of new stock, which will boost Temasek’s stake in DBS to 40.4 percent from 29.5 percent. Approval for that sale is pending as Indonesia decides on new rules for foreign ownership of banks.

“Chances of the deal going through is quite high despite the occasional noise” from Indonesia, CIMB’s Song said.

Temasek also started a property venture in June with Khazanah Nasional Bhd., Malaysia’s state-owned investment company, where the two will jointly develop about $9.8 billion of real estate projects including hotels, apartments and offices in southern Malaysia and Singapore.

Sizable Transactions
The Singapore firm expects Europe’s crisis to create opportunities for acquisitions, Chief Investment Officer Tan said. The company, which has a net-cash position, has the flexibility to undertake “sizable” transactions including those exceeding S$1 billion, he said.

Bocconi University’s 2011 sovereign wealth funds report showed state-backed investment companies completed a record 237 publicly reported, direct investments worth $80.9 billion, 72 percent higher than the $47.1 billion in 2010.

“The kind of investments they’re making are harder to book value on,” Barbary said of Temasek, citing deals in real estate, commodities and Chinese banks that have been “volatile.” “They’re not investing for annual returns. They’re investing for returns 5, 10, 20 years down the line.”

 

[Muthukali]

Vietnam H1 money supply up 6.84 pct from end-2011: gov’t

The money supply in Vietnam's banking system at the end of June was an estimated 6.84 percent higher than at the end of 2011, the government said on Tuesday, without stating a figure.

A government statement, again not giving a value, said that in the first half of 2012, total deposits at banks increased 7.83 percent from the end of last year.

It said that credit growth has started to increase, without giving any numbers.

Many businesses in Vietnam have found it hard to get loans this year, and the central bank has cut interest rates five times in an effort to boost lending.

 

[Muthukali]

China Needs to Ease One-Child Policy, State Researchers Say

Chinese government researchers called on the nation to ease its one-child policy as soon as possible to cope with an aging population and labor shortage.

One option is allowing all people to have a second child, three researchers including Yu Dong from the State Council’s Development Research Center wrote in an article in yesterday’s China Economic Times, a newspaper affiliated with the center. “The longer time we take to adjust the policy, the more vulnerable we become,” the piece said.

The commentary adds to debate on the policy, adopted in the late 1970s, during the deepest economic slowdown since the global financial crisis and ahead of a once-in-a-decade power handover. Last month, the alleged forced abortion of a seven- month-old fetus sparked a public outcry and resulted in the suspension of three officials in a western city.

“It is suggested that the birth control policy be adjusted as soon as possible” against the backdrop of a vanishing demographic dividend, accelerating aging and a potential future labor shortage that are set to become major challenges, the researchers wrote. The recommendation came in a paragraph within a broader piece about social policies.

Working-age people accounted for 74.4 percent of the population in 2011, down from 74.5 percent in the previous year, the first decline since 2002, according to the National Bureau of Statistics. People age 60 and older were 13.3 percent of the population in 2010, 2.9 percentage points higher than in 2000, according to the latest census results released last year.

Fertility Rate
China’s fertility rate has already been below the replacement level of 2.1, the researchers wrote. The situation will worsen as the nation pushes ahead with urbanization and industrialization and the education level rises, they said.

Increasing the fertility rate to 2.3 children per woman, from about 1.6, would cut the decline in the workforce in half by 2050 to 8.8 percent, from 17.3 percent, according to the United Nations.

The country allows exceptions to the one-child policy including permitting rural families to have a second child if the first is a girl. Couples in some regions are allowed a second child if both parents are single children. Minority ethnic groups are excluded from the restriction. Those who can afford to can have a second or third baby by paying a fine.

 

[Muthukali]

Australia Retail Sales Rise More Than Forecast; Dollar Jumps

Australian retail sales advanced more than economists forecast in May on stronger spending at restaurants and department stores, sending the local dollar to a two-month high as traders pared bets on an interest-rate cut.

Sales climbed 0.5 percent to A$21.3 billion ($22 billion) from a month earlier, when they rose a revised 0.1 percent, the fifth straight monthly gain, the Bureau of Statistics said in Sydney today. Sales in April were previously reported to have dropped 0.2 percent. The May result compares with economists’ forecast in a Bloomberg survey for a 0.2 percent gain.

The longest stretch of retail sales increases since 2010 may encourage Reserve Bank of Australia Governor Glenn Stevens to extend this week’s rate pause after 75 basis points in reductions in May and June. Policy makers are trying to support confidence that has weakened among consumers who are saving, even as Australia recorded its best January-to-May period of hiring in five years.

Spending “was concentrated in the discretionary segment, adding to the overall strength of the report,” said Celeste Tay, a Singapore-based economist at 4cast Ltd. Excluding food retailing, which accounts for 40 percent of the total and fell for the first time this year, retail sales rose by “a more robust 0.9 percent month-on-month,” she said.

Sales at cafes and restaurants jumped 1.4 percent in May from a month earlier, and consumers spent 1 percent more at department stores, today’s report showed. They spent 0.1 percent less at food retailers, it showed.

Currency Strength
After the report, the local dollar reached $1.0320 in Sydney, the highest level since May 3. Traders are pricing in a 52 percent chance Stevens will hold the benchmark rate at 3.5 percent for a second straight month in August, up from 43 percent yesterday, according to swaps data compiled by Bloomberg.

Sales in May were strongest in regions of the country where the biggest resources boom since the 1850s is occurring, today’s report showed. Sales were up 1.6 percent in Northern Territory and 1.1 percent in Western Australia, where companies including BHP Billiton Ltd. (BHP) and Woodside Petroleum Ltd. (WPL) are extracting iron ore and natural gas.

A strong currency has helped contain import prices and costs for consumers. A private gauge of Australian inflation released this week dropped in June on weaker fuel and furniture prices, signaling little cost pressure on consumers in the second quarter.

Job Growth
Australia unexpectedly added 38,900 workers in May, and annual economic growth of 4.3 percent in the first quarter was the fastest pace since 2007, government reports showed in the past month.

Tay said she is cautious about the outlook for retail because the nation’s job market is likely to come under pressure.

“Unemployment expectations and perceptions of year ahead family finances remain in recessionary territory,” she said. “Prolonged financial market turbulence, global macroeconomic uncertainty -- due to the ongoing euro-zone crisis and looming U.S. fiscal cliff -- softening asset prices and job insecurity are all headwinds to consumption in the period ahead.”

Woolworths Ltd. (WOW), Australia’s largest retailer, projects annual online sales will reach A$1 billion by the end of 2014 as consumers shift to buying through websites and smartphone applications.

Woolworths is tapping an increase in website shopping in Australia, where online spending rose 37 percent to A$12.3 billion last year, according to Commonwealth Bank of Australia. (CBA)

 

[Muthukali]

Manchester United picks NYSE for U.S. public offering

(Reuters) - Manchester United has picked the New York Stock Exchange to make its stock market debut, ending months of speculation over where the world's best-supported soccer club would list.

After first eyeing a Hong Kong IPO, the former English Premier League champions had planned a $1 billion listing in Singapore in the second half of last year before putting plans on hold because of market turmoil.

The U.S.-owned club filed with the Securities and Exchange Commission on Tuesday to raise up to $100 million in an initial public offering of its Class A ordinary shares in New York.

In the United States, the amount of money a company says it plans to raise in its first IPO filings is used to calculate registration fees. The final size of the IPO could be different.

Thomson Reuters publication IFR reported last month that the club, which has been English champions a record 19 times and features players such as England's Wayne Rooney, had dropped its plans for an Asian listing in favor of a U.S. listing.

The company filing for a much lower amount than $1 billion originally expected does not come as much of a surprise, said Josef Schuster, founder of Chicago-based financial services firm IPOX Schuster LLC.

"The smaller the float, the higher the relative valuation can be...This may just be a strategy initially to make it appear like a low float IPO," Schuster said. "Traders may believe if the deal is very low, then the company can pop at the opening."

GLOBAL FAN BASE
Manchester United has a global fan base of 659 million, according to a survey commissioned by the club and carried out last year by market researcher Kantar. Almost half of United's supporters were in the Asia-Pacific region.

"It remains to be seen how much the football club is going to benefit in the U.S. where the sport is not very popular ... The perfect place for it to have listed should have been London," Jay Ritter, a University of Florida IPO expert told Reuters.

The club, founded in 1878 as Newton Heath LYR Football Club, plays its home games at Old Trafford in Greater Manchester.

The club's American proprietors, the Glazer family, are well known in the United States as owners of American football team the Tampa Bay Buccaneers.

However, they have faced opposition from United fans after taking over the club in 2005 in a leveraged buyout that left it saddled with hefty debt repayments.

The club's total debt as on March 31 was 423.3 million pounds ($663.67 million), according to the filing.

It intends to use the net proceeds from this offering to repay debt.

"It is going to come down to the valuation. U.S. investors are not going to jump on it right away," IPOX Schuster LLC's Schuster said.

The Glazer family will hold class B shares, which will have 10 votes each representing 67 percent of the voting power of all shareholders, keeping the club's management within their control.

U.S. investors are familiar with the dual-class share structure, which has been used by household names such as Google, Facebook and News Corp.

Jefferies, Credit Suisse, J.P. Morgan, Bank of America Merrill Lynch and Deutsche Bank Securities are underwriting the IPO, Manchester United said in a preliminary prospectus. This leaves out Morgan Stanley, which h was one of the investment banks originally expected to underwrite the Singapore listing.

United did not reveal how many shares it plans to sell or their expected price.

 

[Muthukali]

Benchmark interest rates set to fall

New yuan lending for the year likely to reach 8.5 trillion yuan: Report
China's benchmark interest rates may continue to fall in the coming months but large-scale cuts can be ruled out, the China Banking Association said on Tuesday in a report on the development of the Chinese banking industry.

"From the end of 2010 to the first half of 2011, the central bank was very cautious when increasing the rates because of the capital inflow pressure, and negative real interest rates lasted for a long time. Therefore, in the current circumstances, it's impractical to cut the rates quickly or by a large extent," it said.

In addition, although inflation is expected to remain somewhere between 2.7 and 3.3 percent, it will probably start increasing again in the fourth quarter, which will lessen the likelihood of a more aggressive loosening of monetary policy, said the association, which has close ties with the China Banking Regulatory Commission.

It said corporate financing costs have already been declining as market interest rates fall.

"And the credit environment will continue to become more relaxed, as new yuan lending throughout the year is likely to reach 8 to 8.5 trillion yuan ($1.3 trillion)," it said, forecasting that the reserve requirement ratio for commercial lenders will be cut a further one to three times, each time by 50 basis points.

But banks' profits will show "obvious" declines this year as economic growth slows, credit demand softens and net interest margins narrow, said the association.

China's central bank cut interest rates in June for the first time since 2008 to shore up an economy that is losing steam. It has lowered reserve requirements for banks on three occasions since the fourth quarter of last year to improve market liquidity.

China's economic growth slowed to 8.1 percent in the first quarter, the weakest in nearly three years. The slowdown will continue as analysts expect GDP growth to decline to around 7.5 percent in the second quarter.

The official purchasing managers' index dipped to 50.2 in June from 50.4 in May, and nine out of the 11 sub-indices indicate contraction in manufacturing activities.

Zhang Zhiwei, chief China economist at Nomura Holdings Inc, said he expected further policy easing, including a reserve requirement ratio cut in July, to help the economy rebound in the third quarter.

The banking association warned that commercial banks will face greater liquidity risks throughout this year as deposit tension increases and the risks of asset-liability maturity mismatch rise, under current policy circumstances.

And the government's efforts to liberalize interest rates and the yuan exchange rate will further jeopardize liquidity among lenders, said Lian Ping, chief economist at Bank of Communications Co Ltd.

The report suggested the process of interest rate liberalization should not proceed hastily, and financial sector deregulation should not go forward with a "big bang" approach.

"In order to avoid vicious competition among banks, the authorities should give financial institutions sufficient buffer time to adjust their balance and income structure, and to gradually establish a pricing and risk management mechanism."

It said the upper and lower limits of benchmark interest rates will remain basically stable for a while as the government needs to observe the aftereffects of its allowing deposit rates to exceed the benchmark rates for the first time in June.

The China Banking Regulatory Commission has remarked on liquidity risks among lenders since the beginning of the year, and will publish standards for liquidity indicators within this year, according to Yan Qingmin, assistant chairman of the commission.

It will apply new regulatory parameters, such as the liquidity coverage ratio, which sets the standards on highly liquid assets held by banks to meet short-term obligations, and the net stable funding ratio, which measures medium- and long-term funding of banks' assets, the commission said earlier.

 

[Muthukali]

Asian Stocks, Oil Drop on Signs Europe Slump Is Worsening

Asian stocks retreated from an eight- week high and crude oil dropped after data indicated a worsening economic slump in Europe. The yen weakened against most major peers as Japan signaled further monetary easing.

The MSCI Asia Pacific Index slid 0.4 percent as of 11:25 a.m. in Tokyo, while futures on the Standard & Poor’s 500 Index declined 0.4 percent. The yen traded weaker than 80 versus the dollar for the first time since June 25. The Philippine peso rose toward a four-year high after a Standard & Poor’s upgrade, while crude oil fell 0.8 percent in New York, where financial markets were closed yesterday for a holiday. Treasuries gained before U.S. jobs reports today and tomorrow.

A deteriorating outlook for the global economy is fueling speculation central banks will step up efforts to revive growth. The Bank of Japan will use monetary policy to ensure financial stability, Governor Masaaki Shirakawa said today. The European Central Bank will probably reduce its benchmark interest rate to a record-low 0.75 percent at a policy meeting today, while the Bank of England will step up bond purchases that boost the supply of pounds, according to Bloomberg surveys of economists.

“The market is likely to be in a gridlock,” said Mitsushige Akino, Tokyo-based chief fund manager at Ichiyoshi Investment Management Co., which oversees about 40 billion yen ($501 million). “You want to wait and see how the ECB meeting and the U.S. jobs data will come out.”

The yield on 10-year U.S. Treasuries fell three basis points, or 0.03 percentage point, to 1.60 percent. Employers in the world’s biggest economy are expected to have increased payrolls by 90,000 workers in June after a 69,000 gain in May, according to the median estimate in a Bloomberg survey before Labor Department figures due tomorrow.

Investors ‘Skeptical’
All 10 industry groups in the MSCI Asia Pacific Index declined, led by losses in energy stocks. The Hang Seng Index dropped 0.4 percent, the Shanghai Composite (SHCOMP) slid 1.2 percent and Australia’s S&P/ASX 200 Index fell 0.3 percent.

“I would still be cautious to suggest that there’s going to be a sustained move upwards,” said Tim Schroeders, a portfolio manager who helps manage $1 billion in equities at Pengana Capital Ltd. in Melbourne. Investors are “skeptical” Europe will address its debt crisis in a timely fashion, he added.

The euro was little changed at $1.2526 following a 0.6 percent slide yesterday. Spain is scheduled to auction three-, four- and 10-year bonds today. The nation’s benchmark 10-year securities yielded 6.41 percent yesterday, compared with a euro- lifetime high of 7.29 percent reached June 18.

The Philippine peso strengthened 0.3 percent to 41.69 per dollar in Manila, near a four-year high of 41.60 reached yesterday. The nation’s long-term foreign currency-denominated debt was increased one level to BB+ from BB, S&P said in a statement yesterday. That’s one step below investment grade and on a par with neighboring Indonesia.

 

[Muthukali]

Treasuries Rise as Data May Show Struggle to Add Jobs

Treasuries rose, pushing benchmark yields to within 17 basis points of the record low, before reports today and tomorrow that economists said will show the U.S. is struggling to add jobs.

The Federal Reserve plans to buy as much as $5 billion of U.S. government securities due from August 2020 to May 2022 today as part of its effort to support the economy by reducing long-term interest rates, according to the Fed Bank of New York’s website. The economy is “slowing markedly,” Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., wrote on Twitter July 3.

“There’s a lot of support for Treasuries,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “Jobs growth is sluggish. The pace of recovery seems to be slowing.” BNP is one of the 21 primary dealers that trade directly with the Fed.

Benchmark 10-year yields declined three basis points, or 0.03 percentage point, to 1.60 percent as of 11:03 a.m. in Tokyo, according to Bloomberg Bond Trader data. The record low was 1.44 percent set June 1. The 1.75 percent note due in May 2022 rose 1/4, or $2.50 per $1,000 face amount, to 101 11/32.

Japan’s 10-year rate was unchanged at 0.815 percent, versus this year’s low of 0.79 percent set June 4.

The U.S. added 90,000 jobs in June and the jobless rate held at 8.2 percent, based on Bloomberg News surveys of economists before the Labor Department reports the figures tomorrow. It would be the third month that the economy created fewer than 100,000 positions.

ADP, Labor
Yields slid to a record following the prior employment report on June 1, when the Labor Department said payrolls grew by 69,000, the smallest gain in a year.

ADP Employer Services, which compiles a private report on payrolls, will say today that U.S. employment growth slowed to 100,000 in June from 133,000 in May, a separate survey showed. Government figures today will show there were 385,000 first-time claims for unemployment benefits last week, versus the average of 395,600 for the past decade.

Trading of Treasuries opened in Asia after being closed worldwide yesterday for Independence Day in the U.S.

Pimco is avoiding the debt of nations including Spain and Portugal in favor of U.S. Treasuries and mortgage securities, Gross, who runs the world’s biggest bond fund, said June 29 in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

The Fed on June 20 expanded so-called Operation Twist, its program to replace $400 billion of short-term Treasuries in its portfolio with longer-term debt to lengthen the average maturity of its holdings, by $267 billion and extended it until year-end.

 

[Muthukali]

AirAsia, Jetstar Beat Singapore Air, Cathay in Brand Survey

Asia-Pacific budget airlines AirAsia Bhd. (AIRA) and Qantas Airways Ltd. (QAN)’s Jetstar overtook full-service carriers in a brand-reputation survey as more passengers in the region turned to cheaper options amid a global economic slowdown.

Singapore Airlines Ltd. (SIA) and Cathay Pacific Airways Ltd. (293), among the world’s 10 biggest carriers by market value, were ranked below the two low-cost air-travel operators, according to the report compiled by Nielsen Holdings NV (NLSN) and research firm Campaign Asia released today.

Global airline profits are set to fall in 2012 by more than half to $3 billion from $7.9 billion last year, according to the International Air Transport Association, as recessions in the U.K., Spain and other European countries damp demand and erode gains from lower fuel prices.

“It’s an economic reality,” Therese Glennon, managing director of consumer insights for Asia Pacific, Middle East and Africa at Nielsen, said in an interview. “As the demand for budget travel increases, as the economic situation deteriorates, you see a lot of these bigger airlines adjusting their business models.”

Nielsen asked 400 respondents in each of 12 Asia-Pacific countries where it conducted the survey to name the top two brands they thought were most trusted or had the best reputation in 14 categories, including travel and leisure, it said.

Cathay in May predicted “disappointing” first-half earnings. The company has pared passenger-capacity growth, cut flights to North America and Europe this year, imposed a hiring freeze on ground staff and offered cabin crew unpaid leave.

“While we cannot comment on the validity of this specific survey, being unaware of its exact methodology, we can share that for more than 65 years, Cathay Pacific has been serving travelers from around the world,” the airline said in an e- mailed response to questions.
Unexpected Loss

Singapore Air, which posted an unexpected fourth-quarter loss of S$38.2 million ($30 million), started a low-cost carrier that completed its first flight last month. Nicholas Ionides, a spokesman for Singapore Air, declined to comment because he hasn’t seen the report.

Other full-service airlines that were ranked lower include Qantas, Australia’s largest carrier that forecast last month annual profit may fall as much as 91 percent, and Korean Air Lines Co., South Korea’s biggest flier that slumped to a surprise first-quarter loss.

Samsung Electronics Co. (005930), Apple Inc. and Sony Corp. (6758) were the top three brands in the survey.

 

[Muthukali]

Li pledges support for EU recovery

China, Europe have common interests, says vice-premier
China will continue to support the European Union in resolving its debt crisis in a constructive and cooperative way, Vice-Premier Li Keqiang told visiting Portuguese Minister of State and Foreign Minister Paulo Portas on Wednesday.

Li said China and Europe have broad common interests and said the consensus on the eurozone crisis reached at the EU summit sent a positive message to the world.

"I believe this will promote economic recovery and development in Europe," Li said.

China will continue to support EU countries' efforts in resolving the debt crisis in a constructive and cooperative way, Li said, adding that China is ready to expand pragmatic cooperation with the EU in all areas to achieve win-win results.

In another development, Italian Prime Minister Mario Monti and German Chancellor Angela Merkel were scheduled to meet in Rome late on Wednesday to discuss the eurozone crisis after the landmark summit in Brussels last week, AFP reported.

The outcome of the summit was hailed by EU leaders as a breakthrough, and despite skepticism on financial markets about the incomplete details, trading has been steady.

In Europe, stock markets were down. The euro slid to $1.25 from $1.26 late on Tuesday.

Portas' official visit to China from June 30 to Sunday is the first by a member of Lisbon's one-year-old administration.

The visit comes at a time of growing bilateral business relations, increasing Portuguese exports and Chinese participation in Lisbon's privatization program, according to Portugal's Lusa News Agency.

Li said China is ready to increase cooperation with Portugal in areas including trade, new energy, infrastructure construction and telecommunications, and promote the integration of high-tech production and markets.

Portas said Portugal attaches great importance to Sino-Portuguese relations. He said his country is ready to enhance friendly exchanges and pragmatic cooperation with China to realize common development.

Statistics show that China-Portugal trade reached $2.62 billion in 2011, a year-on-year increase of 9.7 percent.

 

[Muthukali]

Central bank launches $22.7b reverse repo

BEIJING -- China's central bank launched a fourth round of reverse repurchase operations Tuesday, only one week after the last round, underscoring cash strains in the banking system.

The 7-day and 14-day repo operations worth 143 billion yuan ($22.7 billion) came after the People's Bank of China, or the central bank, conducted three other rounds in January, May and June, respectively, injecting at least 500 billion yuan of liquidity into the market.

The unprecedented frequency revealed the central bank's intent to ease fresh liquidity strains felt by the commercial banks as they will have to put aside more money in reserve to compensate for previous shortfalls, bank dealers said.

Reverse repo operation means the central bank purchases securities with the agreement to sell them at a higher price at a specific future date, a move to increase liquidity.

After the PBOC's last such move on June 26, the Shanghai Interbank Offered Rates, which measure the cost to banks of borrowing from one another as a key barometer of liquidity, were lower for short-term borrowing no longer than three months.

The PBOC Monday restated the prudent monetary policy that it would continue to implement this year, and vowed to keep the policymaking flexible to cope with slowing economic growth.

E Yongjian, an analyst with the Bank of Communications, said compared with the other liquidity injection tools, such as hike in Reserve Requirement Ratio, reverse repo operation affects the market in a more direct way.

Analysts said market liquidity is influenced by the amount of yuan funds outstanding for foreign exchange, which in turn decides the amount of yuan funds that the PBOC had to inject to offset the same amount of foreign exchange inflow from trade surplus and overseas speculative money, as yuan remained inconvertible under the capital account.

The deepening sovereign debt crisis in Europe and shrinking external demand has slowed China's foreign trade, resulting in a decrease of yuan funds outstanding for foreign exchange.

Under such circumstances, RRR hikes, reverse repo and repo agreements will become central bank's ammunitions to pump liquidity into the market over the coming months, according to analysts.

A report released by the China International Capital Corp, an investment bank, said although the PBOC had lowered the RRR for three times and the benchmark interest rate once since November, the real lending and deposit rates remained high.

E Yongjian forecasted that the central bank would lower the RRR for one to three times in the rest of the year. Currently, China's commercial banks have to keep 20.5 percent of their cash in reserve.

 

[Muthukali]

ECB Cuts Benchmark Rate to Record Low of 0.75%, Deposit to Zero

The European Central Bank cut interest rates to a record low and said it won’t pay anything on overnight deposits as the sovereign debt crisis threatens to drive the euro region into recession.

Policy makers meeting in Frankfurt today lowered the ECB’s main refinancing rate to 0.75 percent from 1 percent, as predicted by 49 of 64 economists in a Bloomberg News survey. The ECB also cut its deposit rate to zero from 0.25 percent and its marginal lending rate to 1.5 percent from 1.75 percent. President Mario Draghi holds a press conference at 2:30 p.m. in Frankfurt to explain the decision.

With Europe’s debt crisis curbing growth across the continent and damping the global outlook, the ECB was under pressure to ease monetary conditions, even though Draghi last month voiced misgivings about the effectiveness of a rate reduction. While today’s moves may not stimulate demand, they will lower borrowing costs for struggling banks and could build on the confidence boost euro-area governments delivered last week when they took steps toward a deeper economic union.

“The benchmark rate doesn’t really matter at the moment, but cutting the deposit rate all the way to zero takes the ECB into new territory,” said James Nixon, chief European economist at Societe Generale SA in London. “If you can kick-start the money market you go a long way to addressing some of the funding problems that banks face. That may free banks to lend to the economy.”

Global Easing
Central banks around the globe are easing policy in response to Europe’s debt crisis, which has pushed at least seven euro nations into recession and forced five of them to seek bailouts.

The Bank of England, which has been drawn into the scandal over Barclays Plc’s rigging of Libor rates, today raised its target for bond purchases by 50 billion pounds ($78 billion) to 375 billion pounds. The U.S. and Australian central banks eased monetary policy last month and China cut rates today.

In Europe, bond and equity markets rallied last week after euro-area leaders opened the way to recapitalizing banks directly with bailout funds once a single banking supervisor is established. They also dropped the requirement that taxpayers get preferred creditor status on aid to Spain’s crippled lenders.

Yields on Spanish 10-year bonds fell to 6.25 percent yesterday from 6.94 percent on June 28. They rose to 6.53 percent this morning.

Deposit Rate
A deposit rate of zero may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. About 800 billion euros ($1 trillion) is currently being deposited with the ECB each day.

The deposit rate has steered market borrowing costs since the ECB started to provide banks with unlimited liquidity after the collapse of Lehman Brothers Holdings Inc. in 2008. That policy removed the need for banks to lend to each other to meet their reserve requirements, pushing down interest rates. Today’s move may therefore lower the euro overnight index average, or Eonia, which stood at 0.33 percent yesterday.

“Cutting the deposit rate reduces bank lending rates, and indirectly it helps the economy,” said Martin Van Vliet, senior euro-area economist at ING Bank in Amsterdam. “It’s not a silver bullet, but everything helps.”

Benchmark Rate
Cutting the benchmark rate will lower the cost of ECB loans. The ECB has lent banks more than 1 trillion euros for three years in its so-called Longer Term Refinancing Operations, with the interest determined by the average of the benchmark rate over the period of the loans.

Draghi last month questioned the effectiveness of cutting rates, arguing that “price signals” have a “relatively limited immediate effect” amid financial-market tensions. Euro-area economic data have deteriorated since then.

Unemployment rose to a record 11.1 percent in May, economic confidence slumped to the lowest in more than two and a half years in June, and data yesterday confirmed that services and manufacturing output contracted for a fifth month. The euro economy will shrink 0.3 percent this year, according to the European Commission.

“It does look like it is going to be a somewhat rocky 2012 for the euro-area economy,” said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London. “At the same time, I don’t think the ECB are convinced that conventional policy has that much of an impact.”