ECB's Rehn: Soaring yields may curb inflation impact of expensive energy

Inflation has risen well past 3% in recent months and could approach 4% by the end of the year, twice the ECB's target, putting pressure on the central bank to raise interest rates further after two hikes this summer. Rehn pointed to risks in both directions, noting that while higher energy prices increase inflation, the rise in long-term interest rates will slow growth and reduce the pass-through of the energy shock to other prices and wages. He emphasized that projections for growth and inflation continue to be subject to very high, pervasive uncertainty.

Government borrowing costs have soared in recent weeks, partly due to rising US yields driven by concerns about unsustainable US fiscal policy. Yields have also increased as major tech companies issue record debt for AI investments, crowding out other borrowers. The 10-year borrowing cost for Germany, considered one of the safest borrowers, is at a 17-year high of 3.57%, while a similar US bond yields 5.32%.

Rehn also cautioned that high valuations in AI-related technology pose a stability risk, as a sharp correction could spread through equity and credit markets. He noted that while technological revolutions can transform economies, financial markets may overestimate their immediate returns.

Despite these challenges, Rehn observed that the euro zone economy is proving surprisingly resilient, with growth holding up better against high energy costs than initially feared.