Christine Lagarde: Bond Selloff Raises Borrowing Costs, Slows Growth and Eases Inflation in the Euro Area
European Central Bank President Christine Lagarde said on Saturday that a selloff in bonds is raising borrowing costs in the euro area, slowing economic growth and ultimately easing inflationary pressures.
Bond yields have risen around the world in recent weeks, with heavily indebted France among the hardest hit. The increase reflects concerns about debt and inflation, as well as growing competition for credit from investment in artificial intelligence.
Lagarde said tighter financing conditions would make it harder for consumers to absorb higher fuel prices resulting from the war with Iran than the ECB had projected last month.
“While growth has been resilient, financing conditions have tightened, with long-term interest rates rising notably since our last meeting,” Lagarde told central bankers and finance ministers gathered in Bangkok. “This will slow growth and reduce pass-through by more than projected in our September exercise.”
The ECB has raised interest rates twice in the past four months, and a further increase is expected in December. That would take its policy rate to 2.75%, a level the bank considers restrictive to economic activity.
Joachim Nagel, an ECB policymaker and president of Germany’s Bundesbank, signaled that further monetary tightening may be needed. He said the bank would make decisions at each meeting based on incoming data.
“We are fighting against inflation. I’m of the opinion that the job is not done so far,” Nagel said at a DZ Bank event in the Thai capital. “I do see that maybe we have to do more.”
Fellow ECB policymaker Olli Rehn said the bank would watch for “second-round effects” of higher energy prices on other prices and wages.
“There is no sign of second-round effects, but we will stay vigilant because they might creep in quietly like a cat in socks,” Rehn said.
