Global Market: Eurozone bond selloff to weigh on growth, curb inflation, Lagarde says

Rising bond yields are complicating the ECB’s efforts to contain inflation without further weakening economic growth.

Rising bond yields worldwide in recent weeks have reflected concerns about government debt, persistent inflation and increased competition for credit from investments in artificial intelligence. France, which carries a heavy debt burden, has been among the countries most affected by the selloff.

According to Reuters, Lagarde said tighter financing conditions would slow economic activity and reduce the extent to which higher energy prices linked to the Iran war feed through to broader inflation, although the impact could differ from the ECB's previous projections.

Speaking at a gathering of central bankers and finance ministers in Bangkok, Lagarde said long-term interest rates had risen notably since the central bank's previous policy meeting, making financial conditions tighter than anticipated.

The development comes as the ECB weighs the inflationary impact of higher fuel prices against the risk of weakening economic growth. Higher borrowing costs can discourage household spending and business investment, potentially reducing demand and easing inflationary pressures over time.

The ECB has raised interest rates twice in the past four months, with another increase expected in December that would take its policy rate to 2.75%. The central bank considers that level restrictive, meaning it could weigh on economic activity.

However, policymakers remain concerned that higher energy costs could spread to other prices and wages, making inflation more persistent.

Bundesbank President Joachim Nagel indicated that further monetary tightening could be necessary, while stressing that decisions would depend on incoming economic data at each meeting. He said the ECB's fight against inflation was not yet complete and that additional action might be required.

ECB policymaker Olli Rehn, Finland's central bank governor, said the bank would closely monitor potential second-round effects from energy inflation. Such effects occur when higher energy costs lead to broader price increases and wage demands, potentially creating a more persistent inflation cycle.

Rehn noted that there were no signs of such effects so far but said the ECB would remain vigilant.

The latest bond market turmoil presents a challenge for the ECB as it seeks to contain inflation without placing excessive pressure on an economy already facing higher energy costs and tighter financing conditions. Policymakers will continue to assess incoming data to determine whether further interest rate increases are needed.