Lagarde warns bond selloff will cool euro zone inflation

what happened

European Central Bank President Christine Lagarde said on Saturday that a sell-off in government bonds is pushing up the cost of loans across the euro area, weighing on growth and, eventually, on inflation. According to TradingView, yields have climbed sharply worldwide in recent weeks, with heavily indebted France among the hardest hit, amid concerns about public debt, inflation and rising competition for funds from AI projects.

Speaking at a gathering of central bankers and finance ministers in Bangkok, Lagarde said tighter financial conditions will make it harder for consumers to pass on higher fuel costs linked to the Iran war. She noted that long-term rates have risen materially since the ECB's last meeting, which will cut pass-through more than the bank projected in September. The ECB has raised rates twice in four months, and another increase is widely expected in December, taking the policy rate to 2.75%, a level the bank regards as restrictive.

Fellow policymaker Joachim Nagel hinted at further tightening, though he said decisions will be made meeting by meeting based on incoming data. Olli Rehn of Finland said the bank is watching for second-round effects from energy inflation on prices and wages. He said no such effects are visible yet, but the bank will remain alert.

why it matters

For markets, the key signal is that the ECB sees rising bond yields doing part of the tightening work it had planned to do itself. French government debt and other euro area bonds are the most exposed, and the euro is sensitive to any shift in expectations for interest rates.

market impact

Euro zone bonds: higher yields and ECB tightening expectations pressure French debt and support the euro

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