Soaring Borrowing Costs May Curb Inflation Impact of High Energy Prices

Finnish central bank chief Olli Rehn has warned that soaring long-term borrowing costs may limit the impact of high energy prices on inflation. Speaking at a conference, Rehn noted that energy prices are approaching the European Central Bank's 'adverse' scenario, with inflation set to reach around 4% by the end of the year.

However, he also pointed out that rising long-term interest rates will slow growth and reduce the pass-through of energy shocks to other prices and wages. This suggests that the ECB may not need to raise interest rates further, despite inflation exceeding its target of 2%

The rise in long-term borrowing costs has been driven by a combination of factors, including increased US yields on concerns over Washington's fiscal policy and record debt issuance by tech companies to finance AI investment.

Rehn also warned that the high valuations of tech stocks pose a stability risk, with a sharp correction potentially spreading through equity and credit markets.