Irish government borrowing costs have surged back to levels last seen in 2014, as markets across Europe react to higher than expected euro zone inflation figures.
Ten-year borrowing rates for the Republic are now around 3.25 per cent, more than half a point higher than they were a month ago. This will increase the cost of new borrowing for the Government and points to rapidly changing expectations on ECB interest rates, which are now expected to rise significantly further over the next few months.
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Euro zone inflation figures showed a headline rate of 8.5 per cent in February, down just marginally from January’s 8.6 per cent and above earlier expectations of a more significant decline. Core inflation, which factors out energy and food price, rose from 5.3 per cent to 5.6 per cent and this will underpin expectations of higher ECB rates.
Markets have raised their expectations about the rate hiking path, with the December 2023 ECB euro short-term rate forward rising as high as 3.94 per cent, implying expectations for a deposit rate at around 4.04 per cent by year-end. With the ECB deposit rate currently at 2.5 per cent, this implies another 1.5 percentage points increase in the months ahead, a heavy burden for mortgage holders on variable rates.
The ECB’s top three shareholders charted different paths for interest rates on Wednesday in a preview of the problematic debate awaiting the ECB in the coming weeks.
Investors seem to be more on the hawkish side as Francois Villeroy de Galhau, a centrist, said the ECB should now become “more gradual” in raising rates and close its hiking cycle by September at the latest.
ECB president Christine Lagarde said on Thursday that further interest rate hikes are “possible” after March, depending on the incoming data.
Germany’s 10-year government bond yield, the bloc’s benchmark, was up 4 basis points (bps) at 2.754 per cent after hitting its highest since July 2011 at 2.77 per cent.
Yields on 10-year French, Spanish, Portuguese and Irish bonds were at their highest levels since mid-January 2012, January 2014, April 2017 and February 2014, respectively.
The German two-year yield, most sensitive to changes in policy rate expectations, rose 3.5 bps to 3.233 per cent after hitting its highest since October 2008 at 3.257 per cent.
“The new multiyear highs in 5y5y (inflation forwards) above 2.5 per cent highlight the market’s shift away from pricing temporary price shocks to pricing structurally higher inflation, leaving the all-time highs from 2008/09 as the next target,” said Michael Leister, head of interest rates strategy at Commerzbank.
A key market gauge of euro zone long-term inflation expectations rose as high as 2.5203 per cent on Wednesday.
Italy’s 10-year government bond yield hit a fresh two-month high at 4.645 per cent and was last at 4.619 per cent, up 4 basis points.
The spread between Italian and German 10-year yields remained subdued at 186.1 basis points. – Reuters
