Inflation and Rising Bond Yields Will Hit the ECB’s Pain Point
Italy’s climbing debt burden leaves it more vulnerable than ever to higher borrowing costs. The ECB needs to step in.
Uh oh.
Photographer: John Thys/AFP
Investors concerned about inflation rearing its capital-eroding head are demanding higher yields in the bond market. But this rise in government borrowing costs, at a time when nations have loaded up on debt to defend their virus-stricken economies, poses a challenge for the European Central Bank, with Italy particularly vulnerable to a financial squeeze.
Markets are anticipating that the combination of fiscal and monetary stimulus will finally stir consumer prices from their lengthy slumber. In the euro zone the five-year forward inflation swap, used by the ECB to gauge expectations, has recently climbed to 1.6%, its highest level in more than two years. This year’s average of 1.4% is the strongest since 2017’s 1.65%.