![]() That’s the second Bloomberg Economics scenario. If the ECB needs to become much more aggressive about lifting rates, Italy’s borrowing costs might become harder to sustain. Such pressures could elevate the so-called neutral rate that central banks judge to neither stimulate nor constrict economic growth, suggesting a need for tighter monetary policy all round. Most forecasters don’t currently expect the ECB’s deposit rate to rise much above 1.5%, in line with market pricing for the so-called terminal rate.Įven if that were to transpire, the medium-term outlook may be more complicated - for example if rising costs of de-globalisation and the green transition keep fuelling inflation. ![]() “That at the margin I think is going to make it difficult for inflation expectations to come down.” ![]() “In Europe, what you’re seeing is wage growth accelerating,” Arend Kapteyn, global head of economic research at UBS Group AG, told Bloomberg Television. The justification for delay is that euro zone inflation is mainly imported, while domestic demand is still contained. The ECB has yet to even start raising rates, while the Federal Reserve and other central banks are tightening drastically. That might be because the bond-buying firepower the ECB deploys is too limited, because strings attached would be too onerous for a benefiting government to agree to, or because the detail is too vague. Their first scenario is of a measure that underwhelms because of the constraints governing it. “That may only be forthcoming in the depths of a crisis.” “If markets believe that discord on the Governing Council is insurmountable, spreads could climb to the point that a political intervention is necessary,” Jamie Rush, Maeva Cousin and David Powell of Bloomberg Economics said in a report. According to Eric Lonergan, a portfolio manager at M&G, selling its bonds was becoming a “one-way bet.” Three paths to Italian turmoil envisaged by Bloomberg Economics encompass an underwhelming ECB response, too many interest-rate hikes for its public finances to stomach, and a tumultuous political crisis.Įvidence of Italy’s vulnerability emerged just last month as the prospect of higher borrowing costs forced the yield on its 10-year debt above 4% for the first time since 2014. Other scenarios are proliferating however. Such muddling through, which kept the currency bloc intact when smaller Greece blew up, remains the default outcome. The need for a new political settlement to fix that fault is starting to become pressing, but in the meantime the onus is on European Central Bank President Christine Lagarde to craft a short-term solution. Just as German policy makers feared and soothsaying economists prophesied at the birth of the currency more than two decades ago, the weakness and indebtedness of the euro area’s third-largest economy risks becoming everyone else’s problem. A financial-market crisis focused on Italy might augur the worst turmoil in the history of the euro.
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