Olli Rehn, Bank of Finland governor and member of the European Central Bank's Governing Council, said on the 2nd that while energy prices are moving closer to the ECB's "adverse scenario," a sharp rise in long-term borrowing costs is holding back the spread of high energy prices into broader inflation across the economy. Euro-area inflation has run well above 3% in recent months and could approach 4% by year-end, twice the ECB's target. The ECB, which raised rates twice this summer, is under pressure to hike further. Speaking at a meeting of the European Systemic Risk Board, Rehn said rising long-term yields slow growth and limit the extent to which the energy shock feeds into other prices and wages, adding that the outlook for growth and inflation is exposed to extremely large and broad uncertainty. Government borrowing costs have surged in recent weeks, driven by rising U.S. Treasury yields amid concerns that U.S. fiscal policy is on an unsustainable path, and by the world's largest technology companies issuing record amounts of bonds to fund AI investment. Rehn warned that borrowing by technology companies poses a financial stability risk because valuations are extremely high and a correction is possible, saying a sharp adjustment in AI-related valuations could spill over into equity and credit markets.
Rehn notes surging long-term government borrowing costs, driven by rising U.S. Treasury yields, which lifts the 10Y yield.
ECB under pressure to hike further while rising long-term yields curb inflation spillover, supporting the euro versus the dollar.
