Get 40% Off
⚠ Earnings Alert! Which stocks are poised to surge?
See the stocks on our ProPicks radar. These strategies gained 19.7% year-to-date.
Unlock full list

Rates must rise but ECB will fight fragmentation -policymakers

Published 06/10/2022, 04:52 AM
Updated 06/10/2022, 01:32 PM
© Reuters. FILE PHOTO: European Central Bank policymaker Francois Villeroy de Galhau, who is also governor of the French central bank, attends the Paris Europlace International Financial Forum in Tokyo, Japan, November 19, 2018. REUTERS/Toru Hanai

PARIS/FRANKFURT (Reuters) -The European Central Bank needs to take "resolute" action to tame inflation but it is also fully determined to contain any undue increase in borrowing costs on the euro zone's periphery, policymakers said on Friday.

The ECB on Thursday flagged a 25 basis point interest rate hike in July and said a bigger increase may be needed in September as inflationary pressures were increasing and broadening, raising the risk that high price growth will become entrenched.

"Euro area inflation rates won't fall by themselves," German Bundesbank President Joachim Nagel said in a statement. "Monetary policy is called upon to reduce inflation through resolute action."

At an event later, Nagel said the ECB's journey to higher rates had just began and its speed will depend on incoming data - a sign he was not clamouring for big rate hikes just yet.

Although the ECB raised its 2022 inflation projection to 6.8% on Thursday, over three times its 2% target, it said that the figure would have been even higher, at 7.1%, if it had also included data released after the cut-off date.

This meant prices in countries such as Germany would grow even faster this year than during the last period of high inflation in the early 1980s.

The rate hikes however raise the risk that a wide gap will open between the borrowing costs of different euro zone members, particularly Germany and more indebted southern nations like Italy, Spain and Greece.

ECB President Christine Lagarde promised to fight "unwarranted" fragmentation of this kind and said the ECB could even deploy a new tool, if necessary, but did not give details.

Doubting the ECB's resolve, investors sold off southern bonds after the ECB's decision and 10-year Italian government bond yields are now 235 basis points above their German counterparts, the widest spread in two years.

"Nobody should have the slightest doubt, including in the markets, concerning our collective will to prevent this fragmentation," French central bank chief Francois Villeroy de Galhau said separately.

"We have the will and nobody should doubt that we will have the tools when necessary," Villeroy told BFM Business radio.

Italy's 10-year yield rose to 3.78% in early trade, its highest since 2018 and just below its highest since 2014, when the euro zone was still caught in a debt crisis.

The equivalent Spanish bond spread to German debt was at 123 basis points on Friday, also a two-year high.

But Villeroy also backed plans to raise rates on account of the worsening inflation outlook.

© Reuters. FILE PHOTO: European Central Bank policymaker Francois Villeroy de Galhau, who is also governor of the French central bank, attends the Paris Europlace International Financial Forum in Tokyo, Japan, November 19, 2018. REUTERS/Toru Hanai

"Inflation is too high and too broad in France, in Europe" he said, adding the European Central Bank was "strongly committed to bringing inflation down to 2%".

The Bundesbank meanwhile doubled its inflation outlook for Germany to over 7% on Friday and halved its growth estimate.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.