* Italian bond yields rise on deficit breach concerns
* BoI says Italy’s deficit could rise to 3.4 pct of GDP in 2020
* 10-year spread over Germany widens (Updates prices)
By Virginia Furness
LONDON, April 16 (Reuters) - Italian stocks and government bonds sold off on Tuesday after a Bank of Italy official said the country’s deficit would rise to 3.4 percent of GDP in 2020 — thereby breaching European Union regulations — without an increase in sales tax.
Italy’s borrowing costs were up 3-5 basis points across the curve on the bank official’s remarks, which also predicted a deficit of 3.3 percent of gross domestic product for 2021 unless the sales tax is raised or other fiscal measures taken.
The benchmark 10-year bond yield rose 7 bps to a one-week high of 2.63 percent before settling at around 2.60 percent by the close. The spread of Italian 10-year bonds over top-rated Germany widened to as much as 258 basis points.
The news has renewed concerns that Italy will breach EU rules on its budget deficit.
“They would be breaching the 3 percent threshold over three years and they wouldn’t comply with Europe as a result,” Natixis strategist Cyril Regnat said.
“They will have to hike the VAT if they want to stabilise the finances. This is very negative for BTPs (Italian government bonds).”
Italian bond yields remain far below the highs of 2018, however, when Italy’s coalition government was at loggerheads with the European Union over its projected budget deficit for 2019. The 10-year yield still remains some 110 basis points lower than the 3.711 percent hit in November last year.
German government bond yields fell briefly to a day’s low after several European Central Bank policymakers expressed doubt about a long-projected growth recovery in the second half of the year.
ECB policymakers think the bank’s economic projections are too optimistic as growth weakness in China and trade tensions linger, four sources with direct knowledge of discussions told Reuters.
German 10-year bund yields briefly fell to 0.042 percent, before recovering to stand at 0.06 percent, slightly higher on the day.
Core euro zone bond yields are hovering near three-week highs after investors bet on an improved outlook for the global economy, despite expectations that loose monetary policy is here to stay.
The mood among German investors improved for the sixth month in a row in April, a ZEW survey showed on Tuesday, as the growth outlook for Europe’s largest economy brightened amid a resilient global economy and a delay to Britain’s departure from the EU.
Chinese growth in the first quarter is forecast to have slowed to 6.3 percent, however, the slowest since the global financial crisis, a Reuters poll showed.
Mixed economic indicators mean global central banks are likely to maintain their dovish outlook, despite some promising recent data.
The European Central Bank is committed to keeping monetary policy loose until inflation returns to its target, ECB policymaker Francois Villeroy de Galhau said on Monday.
Villeroy, who is also governor of the Bank of France, said that euro zone inflation was expected to ease over the course of this year, then gradually recover.
The Reserve Bank of Australia believes a cut in interest rates would be “appropriate” should inflation stay low and unemployment trend higher, the central bank’s April board meeting minutes showed, though members still saw no strong case for a move anytime soon. (Reporting by Virginia Furness, editing by Larry King and Ed Osmond)