French and Italian borrowing rates reach highest levels since a decade

The cost of borrowing public money in the UK, and eurozone has risen amid concerns about large deficits and rates that will remain high for longer.

Eurozone Government borrowing costs reached their highest level for more than ten years on Thursday amid concerns over higher government borrowings in France and Italy.

The yields on UK gilts 10-years have risen the most since February. They reached a high of 4.54pc in Thursday’s trading, the same level as the mini-Budget of last year.

The yields on French 10-year bonds hit a 12-year-high of 3.5pc, while their Italian counterparts reached a 10-year-high of 4.89pc.

French Budget proposals, announced on Wednesday included plans to reduce the deficit from 4.9pc to 4.4pc. This is still above the EU’s 3-pc rule. The French fiscal watchdog criticised a lack of structural cuts in spending.

The Italian government just lowered its debt targets, and stated that it would reduce its expectations of economic growth.

The yields on German 10-year bonds, which is the benchmark for the eurozone’s bond market, have risen to 2,93%, the highest in over 10 years. In Spain, the yields exceeded 4pc for a first time in over a decade.

Andrew Kenningham is the chief Europe economist for Capital Economics. He said that higher oil prices could also influence investor bets.

Kenningham added: “It is possible that this is contributing to the view that inflation will not come down very quickly.”

He said: “There is definitely a shift in the dominant narrative.” Investors expect the central bank rate to remain higher for longer.”

Last week, the US Federal Reserve emphasized the importance of staying on course.

Althea Spinozzi is a senior fixed income strategist with Saxo Bank. She said, “People are beginning to realize that both the ECB as well as the Federal Reserve will keep rates higher longer.”

Analysts agree that the European Central Bank won’t begin cutting rates before next spring. Capital Economics predicts no rate reductions for the next 12 months.

“We think that the ECB would be reluctant to let go of the brakes, even if the inflation drops quite quickly, which I believe it will, as the labour market will still be so strong,” Kenningham said.

Economic outlook is becoming more unstable. The gap between Italian and German gilt rates has increased to almost two percentage points. This is the largest difference since March when the US Banking Crisis sent the European markets into a frenzy.

Ms Spinozzi said that this could create new problems for the ECB because the higher interest rates will affect the Eurozone economies in an uneven manner.

It is one of many drawbacks to having a currency Union. Italy’s debt dynamics could also be a problem. “If they have to pay more for borrowing, they’ll need to grow faster in order to run a larger deficit,” said Mr Kenningham.

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