Lagarde: Higher long-term bond yields will inhibit economic growth or reduce the need for the ECB to raise interest rates sharply

The Zhitong Finance App learned that ECB President Lagarde said on Monday that the recent significant rise in long-term bond yields will curb economic growth in the Eurozone and reduce the extent to which high energy costs are transmitted to overall inflation. At a time when energy prices are rising again, this factor may reduce the need for the ECB to further tighten monetary policy drastically.

Lagarde told European Parliament members in Brussels that although the Eurozone's economic growth has shown resilience, long-term interest rates have risen markedly since the ECB's last policy meeting. “This will slow economic growth and lower the transmission of energy costs to inflation than anticipated in our September forecast.”

She pointed out that there is currently no obvious “second round effect” of inflation, so the ECB should take “moderate countermeasures” according to the situation to ensure that inflation is controlled.

Lagarde's latest statement comes as ECB officials weigh whether further rate hikes are needed. The Middle East conflict is driving up energy prices, and policymakers fear that the continued rise in energy costs may gradually spread to a wider range of prices for goods and services, and further push up wage demands, thus making inflationary pressure more enduring.

Meanwhile, the global bond market has recently experienced a sell-off, and long-term yields have continued to rise. For some eurozone member states with weak fiscal positions, the rising cost of financing is particularly worrying. On the other hand, higher market interest rates themselves will also tighten the financial environment and curb investment and consumption, thereby playing a role similar to monetary policy austerity to a certain extent.

The data released this week is expected to show that the Eurozone inflation rate in September jumped to 3.7% from 3.2% in August, hitting a high level in recent years and further deviating from the ECB's 2% inflation target. Meanwhile, Eurozone consumers' expectations for future price increases rose again last month, heightening policymakers' concerns about the continuation of inflation.

As market hopes for a short-term breakthrough in the Middle East situation waned, international oil prices rose again on Monday, reigniting investors' concerns about rising inflation. The interest rate market currently anticipates that after the ECB has raised interest rates twice so far, its deposit interest rate will increase by a cumulative total of nearly 100 basis points in the next year, which is equivalent to about four 25 basis points each time.

Lagarde's speech showed that the ECB is currently facing two opposing forces. On the one hand, rising energy prices and rising inflation expectations have increased the pressure to raise interest rates further; on the other hand, soaring bond yields have actively tightened financial conditions and may depress economic growth and the transmission of inflation. This requires the ECB to be more careful in balancing the risk of inflation with downward pressure on the economy in future policy adjustments.