Euro Zone Inflation May Hit 4% as Energy Costs Soar

ECB policymaker Olli Rehn warned that inflation in the euro zone could approach 4% by year-end, about twice the central bank's target. The rise in energy prices has pushed up inflation, but higher long-term borrowing costs may limit how far the latest energy shock spreads into broader prices and wages.

Growth is holding up better against high energy costs than earlier fears suggested, according to Rehn. However, elevated AI-related asset valuations and heavy tech borrowing pose financial stability risks if market corrections spill over into broader equity and credit markets.

The German 10-year yield has hit a 17-year high at 3.57% due to rising U.S. yields and record tech-sector bond issuance. This intensifies competition for capital and raises borrowing costs, further pressuring the ECB to raise interest rates further.