Euro Zone Inflation Risks Rise Amid Soaring Energy Costs

Finnish central bank chief Olli Rehn sounded a warning about the euro zone's inflation risks, citing rising energy prices and surging long-term interest rates. He stated that higher energy costs are pushing euro zone inflation closer to the European Central Bank's 'adverse' scenario.

With inflation above 3% in recent months and possibly reaching 4% by year-end, twice the ECB's target, Rehn believes pressure is mounting on the central bank to raise interest rates further. However, he also noted that higher long-term borrowing costs could limit the impact of energy price increases on the wider economy.

Rehn emphasized that projections for growth and inflation remain highly uncertain in both directions. He cautioned that government bond yields have risen sharply in recent weeks, partly due to concerns about Washington's fiscal policy, while the 10-year benchmark German bund has reached its highest level in 17 years at 3.57%. The 30-year Italian gilt stands at 5.32%.

The ECB has warned of inflation risks tilted to the upside. Rehn also expressed concern about heavy technology-sector borrowing and elevated valuations, warning that a sharp correction in artificial intelligence-related assets could spread across stock and credit markets.