ECB’s Lagarde says bond selloff will slow inflation

European Central Bank President Christine Lagarde stated on Saturday that a bond selloff is contributing to higher borrowing costs in the euro zone, which in turn is curbing economic growth and driving up inflation. Bond yields across the globe have risen sharply in recent weeks, with France particularly affected due to concerns over debt, inflation, and increased competition for credit from AI investments.

Lagarde said this development will make it more challenging for consumers to cope with the higher fuel prices stemming from the Iran war, which the ECB had previously forecast. While the overall economic growth has been robust, financing conditions have become tighter as long-term interest rates have been climbing significantly since the bank's last meeting, as Lagarde informed fellow central bankers and finance ministers meeting in Bangkok.

Lagarde emphasized that this trend will slow growth and diminish the expected inflation impact beyond what was anticipated in their September analysis. The ECB has increased interest rates twice in the past four months and expects another hike in December, pushing its policy rate to 2.75%, a level that the central bank deems restrictive on economic activity.

Joachim Nagel, another ECB policymaker, hinted at further rate hikes, although he noted that the bank's decision will be based on the latest data at each meeting. The Bundesbank president, speaking at a DZ Bank event in Bangkok, expressed his belief that the job of combating inflation is not yet complete and believes more action might be required.

ECB policymaker Olli Rehn, alongside Nagel, stressed that the central bank would monitor second-round effects from energy inflation on other prices and wages. While there is no evidence of second-round effects at the moment, Rehn cautioned that they could emerge gradually and unpredictably, urging the ECB to remain watchful.