The European Central Bank is unlikely to raise interest rates this Thursday, despite inflation at 3.8%, as the pressure on the debt of France and other euro countries weighs more heavily on the decision.
Inflation in the eurozone stands at 3.8% and in Spain it hovers around 5%, well above the European Central Bank (ECB) target of 2%. Nevertheless, according to reports from abc.es, the ECB's governing council is expected not to change rates this Thursday.
The most significant factor is another. Investors demand higher returns to lend money to certain European governments, especially France, and concerns are beginning to spread to other eurozone countries.
The yield on the French ten-year bond exceeded 5.14% on October 22, its highest level since 2002. The gap with German debt reached levels not seen since the euro crisis of 2011.
In Spain, the Independent Authority for Fiscal Responsibility (Airef) warned on October 8 that financing conditions are tightening. Between January and August, the Spanish state paid around 24.17 billion euros in debt interest.
Core inflation in the eurozone, which excludes energy and food, has fluctuated between 2.4% and 2.5% in recent months. Analysts believe this figure will serve as an argument for central banks not to raise rates.
In the United States, the personal consumption expenditures deflator, the inflation measure preferred by the Federal Reserve (Fed), rose 3.4% in August compared to a year earlier. Its core rate stood at 3.0% and has been above target for over five and a half years.
“Even though there is a fundamental need to act, it is unlikely that both central banks will change their key rates now,” says Commerzbank economist Marco Wagner.
ING economist Carsten Brzeski distinguishes between the Fed and the ECB, as the signs of stagnation are clearer in the European case.
“So far we have seen little or no increase in core inflation; at the same time, we have the problem of France and the fact that the bond market has taken on the ECB's role,” explains Brzeski.
The chief economist of Berenberg, Holger Schmieding, is also waiting until December. According to him, the rising cost of bonds is already slowing down the European economy.
“Bond yields and, therefore, financing costs for the European economy have increased significantly, which is slowing down the economy,” asserts Schmieding.
The ECB also uses its schedule as an argument. In December, it will present new inflation and growth forecasts, which, it indicates, will allow for a more statistically grounded decision. Lagarde will have to provide explanations at the end of October.
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