ECB Official Says Rising Bond Yields Could Curb Eurozone Inflation

European Central Bank (ECB) official Olli Rehn stated on Tuesday that the rapid rise in energy costs across the euro area has so far been limited to the energy sector, avoiding broader inflation spillover into other goods and services. Rehn noted that the recent increase in bond yields could help mitigate price pressures by slowing economic growth, a perspective shared by ECB chief economist Philip Lane.

Inflation in the eurozone remains significantly above the ECB's 2% target, prompting discussions among policymakers about further interest rate hikes following two increases implemented last summer. While some officials believe inflation risks are leaning toward higher-than-expected outcomes, Rehn highlighted countervailing economic dynamics. He emphasized that rising long-term borrowing costs are contributing to a cooling effect on growth and limiting the spread of energy expenses to other prices and wages.

ECB board member Isabel Schnabel, known for her hawkish stance, warned that escalating borrowing costs might dampen inflation pressures more than anticipated. Bond yields in the eurozone have reached their highest levels in over a decade, driven by rising U.S. yields and concerns about debt sustainability in Europe. Rehn, however, refrained from advocating for any specific policy action, adhering to the ECB's approach of avoiding signals before decisions are made.

Markets currently predict a 80% probability of one to three additional ECB rate hikes by December. Rehn also acknowledged that energy costs remain elevated, but the economy has shown resilience, partly due to substantial investment in artificial intelligence. This durability has led some policymakers to suggest that price pressures might be greater than previously assumed.