Lagarde: bond selloff will slow euro zone growth and inflation more than the ECB projected

A global selloff in government bonds is making borrowing more expensive in the euro zone, which will curb economic growth and ultimately inflation, European Central Bank President Christine Lagarde said on Saturday, 17 October, at the IMF and World Bank meetings in Bangkok, Reuters reported.

What Lagarde said

• Bond yields have surged worldwide in recent weeks, with debt-laden France among the hardest hit, on worries about debt and inflation and growing competition for credit from AI investment, according to Reuters.
• “While growth has been resilient, financing conditions have tightened, with long-term interest rates rising notably since our last meeting,” Lagarde said. She added that this would slow growth and reduce the pass-through of higher fuel prices from the Iran war by more than the ECB projected in September.

More tightening?

• The ECB has raised interest rates twice in the last four months, and a further hike is expected in December, which would take the policy rate to 2.75%, a level the bank considers restrictive, Reuters noted.
• Bundesbank President Joachim Nagel hinted at more tightening: “I’m of the opinion that the job is not done so far… maybe we have to do more,” he said, while stressing decisions are taken meeting by meeting.
• Finland’s Olli Rehn said there were no signs yet of “second-round effects” of energy inflation on wages and other prices, but that the ECB would stay vigilant.