Sanctions tighten

July 17, 2014

Britain's PM Cameron, Portugal's PM Passos Coelho, Germany's Chancellor Merkel and Finland's PM Stubb attend an EU leaders summit in Brussels

EU leaders failed to get anywhere on sharing out the top jobs in Brussels last night but did manage another round of sanctions against Russia.

This time they will target Russian companies that help destabilize Ukraine and will ask the EU’s bank, the European Investment Bank, to suspend new lending for Russia and seek a halt to new lending to Russia by the European Bank for Reconstruction and Development.

That represents a significant stiffening of its measures though still some way short of the United States which yesterday imposed its most wide-ranging sanctions yet on Russia’s economy, including Gazprombank and Rosneft as well as other major banks and energy and defence companies.

Moscow shares have fallen in response, with Russia’s largest oil producer Rosneft tumbling 6 percent and dragging other energy, financial and defence firms with it. Vladimir Putin said the U.S. sanctions will take relations with Russia to a “dead end” and damage U.S. business interests in his country.

The EU leaders will reconvene at the end of August to sort out the new faces who will run the European Commission but the difficulty in agreeing names for the top economic jobs and even the European Council president suggests that views of how to put the bloc’s economy right continue to differ.

For instance, diplomats said French President Francois Hollande could accept Danish premier Helle Thorning-Schmidt as council president if France’s candidate was assured of the key economic commissioner’s job, which supervises national budgets. However, Germany is not keen to see former Finance Minister Pierre Moscovici in that role because Paris is still off track to bring its deficit down to the EU limit.

A clutch of central bank meetings today.

The Turkish central bank has repeatedly forecast that inflation is about to fall but until recently had resisted pressure from Prime Minister Tayyip Erdogan and his government to cut rates which were raised precipitously earlier this year to defend a freefalling lira. However, in June, it cut the main one-week repo rate by 75 basis points to 8.75 percent and economists expect a further half-point to be lopped off this time.

According to a Reuters poll of economists, inflation is forecast to rise to 8.4 percent at year-end, up from the previous poll forecast of 8.0 percent. Central Bank Governor Erdem Basci has pledged to bring inflation down to 5.0 percent by the end of 2015. Inflation next year is expected to average 7.0 percent, according to the poll.

South Africa’s central bank faces inflation above its 3-6 percent target band at what it calls an “uncomfortably high” level so there is little prospect of it easing policy to help a sluggish economy. If anything, it may head in the other direction having raised rates by 50 basis points in January.

Reuters polling produced a consensus that the Reserve Bank will wait until September before raising rates. But 13 of 31 economists surveyed predicted either a quarter- or half-point hike today. So it could be a close call. The open-ended strike called by more than 200,000 workers in South Africa’s biggest union may stay the central bank’s hand for now.

Egypt kept rates on hold in May, just after former army chief Abdel Fattah al-Sisi was elected president. Annual inflation reached its highest in nearly four years in November at 13 percent but has edged down to below 9 percent since then.

Egypt’s economy has been in turmoil since a popular uprising ousted autocrat Hosni Mubarak in 2011 and the government has now announced deep cuts in energy subsidies, a first step toward reducing the deficit.

Consumer inflation held steady at 8.2 percent in June but the cutting of fuel subsidies by the government will push prices up so the consensus is for no move to come this time and may be not in the coming months either.

Portuguese Finance Minister Maria Luis Albuquerque speaks to a parliament committee about the state of Banco Espirito Santo. Euro zone debt has had a minor wobble on the troubles of Portugal’s largest listed bank but only a minor one.

Spanish and French bond auctions today will serve as the latest test of investor appetite. Madrid will offer up to 3 billion euros over a range of maturities and Paris intends to sell up to 10 billion euros of fixed-rate, medium-term bonds and inflation-linked paper.

Iran and six world powers are working to finalise the terms of an extension in negotiations over Tehran’s nuclear programme beyond a July 20 deadline and a formal announcement may come as early as Friday, according to Western diplomats said.
Officials from both sides believe the talks would not yield a breakthrough by the self-imposed target date after two weeks of efforts failed to bridge gaps in  positions over a deal intended to end a decade-long dispute.

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