ZCZC
BCN-03
US-EU-ECB-INFLATION
Europe less at risk of inflation and rate fears: analysts
PARIS, Feb 28, 2021 (BSS/AFP) – Investors are watching inflation
carefully, worried that a boiling over of prices will ruin the expected
strong pandemic recovery although analysts believe Europe faces much less of
a risk than the United States.
Fears that US President Biden’s $1.9 trillion stimulus plan — which was
passed by the House of Representatives on Friday — will stoke up the economy
too much have unnerved investors in recent weeks.
A rise in yields on 10-year US Treasury bonds — a key indicator of
expectations — shows the markets believe prices are set to rise much more
sharply than last year’s gain of 1.4 percent, which could force the US
Federal Reserve to hike interest rates earlier than it says it plans to do.
Bond yields have risen elsewhere too, with 10-year French government bonds
turning positive on Thursday for the first time in months while the benchmark
10-year German Bund has also risen although it remains negative.
European inflation data for January showed a jump in prices of 0.9 percent
compared to a minus 0.3 percent reading in December, as increased costs of
raw materials fed through into services and industrial goods.
After having slowed considerably in 2020, inflation is expected to rise
this year in Europe as the economy picks up following the relaxation of
measures to slow the spread of the Covid-19 pandemic.
But it is not so much a spike in inflation that worries investors but that
the Fed would raise interest rates faster than it has communicated.
Federal Reserve Chairman Jerome Powell pledged Tuesday that the US central
bank will keep benchmark lending rates low until the economy is at full
employment and inflation has risen consistently above its 2.0 percent target.
But bond yields continued to rise, indicating investor concern about a
rise in interest rates that would make borrowing and investment more
expensive and slow the economy.
However, many analysts are sceptical that Biden’s stimulus programme will
spark considerable inflation.
“It isn’t clear that Biden’s recovery plan will create lots of inflation,”
said Xavier Ragot, head of the French Economic Observatory think tank.
For the European Union, there is no likelihood that its pandemic recovery
programme would, he believes.
“The amounts of the European recovery plans pose absolutely no
inflationary risk,” he said.
– ‘No risk of overheating’ –
The European Commission’s recovery programme is worth 750 billion euros
($920 billion), with several EU members also having their own national
programmes.
“We have a European recovery programme… considerably less strong, and a
loss of growth that is much greater, so there aren’t the same risks of
overheating as in the United States,” said Fabien Tripier, an economist at
CEPII, a Paris-based research centre on the world economy.
The US economy shrank 3.5 percent last year while the drop for the
eurozone was nearly double that.
There is “no risk of overheating or a sustained rise in inflation” in the
eurozone, the head of the Banque de France, Francois Villeroy de Galhau,
insisted this past week.
The French Economic Observatory’s Ragot also does not believe that if the
Fed is pushed by the markets into raising rates that the European Central
Bank would be forced to follow suit.
“It doesn’t work like that in macroeconomics,” he said, noting that the
monetary policy of the Fed and ECB had diverged considerably at the start of
the last decade.
“With loose financial conditions still necessary to support the economy,
the ECB is unlikely to react to the coming inflation overshoot,” said Capital
Economics economist Jack Allen-Reynolds.
Francois Villeroy de Galhau, who as head of the Banque de France also sits
on the ECB’s Governing Council, said the central bank wants to “maintain
favourable financing conditions”.
For Fabien Tripier, the ECB needs to send “a strong signal” to the markets
against the idea that “just because inflation hits 1.5 percent or 2.2
percent, speculation it will hike rates should begin.”
The ECB issued a reassuring message on Friday as executive board member
Isabel Schnabel said it could broaden its support for the economy in case of
a sharp rise in interest rates.
BSS/AFP/MSY/1033 hrs