According to the bulletin of the European Central Bank, “the news on the measures envisaged in the Budget” also weighs heavily.
In In Italy the spread rises more than in other European countries and, among other factors, the news on the measures contained in the 2024 budget also weighs heavily. The European Central Bank highlights this in its bulletin.
In the Eurozone, the yields of ten-year government bonds, explains the ECB, “have generally moved in line with long-term risk-free rates. During the period under review the changes in the spreads on government bonds were very limited, with the exception of the Italian differential, which has widened to some extent, probably as a result of idiosyncratic factors linked, among other things, to news regarding the fiscal measures envisaged by the national budget law”.
On 25 October, we read more generally, the GDP-weighted average yield of ten-year government bonds in the euro area stood at around 3.5%, around 25 basis points above the level recorded at beginning of the period under review.
Inflation and rates
The increases in interest rates established by the ECB in recent months “continue to be vigorously transmitted to financing conditions, increasingly slowing down demand and therefore contributing to the reduction of inflation”, the Frankfurt institute further indicates. The Governing Council, we read in the document, “is determined to ensure the timely return of inflation to the 2% objective in the medium term” and “on the basis of the current assessment, believes that rates are positioned at levels which, if maintained for over a sufficiently long period, will make a substantial contribution to the timely return of inflation to target.”
Future decisions of the Governing Council, continues the ECB, “will ensure that ECB key interest rates are set at sufficiently restrictive levels for as long as necessary to ensure such a timely return. The Governing Council will continue to follow a data-driven approach in determining the level and duration In any case – the Frankfurt institute further explains in the bulletin – the governing council is ready to adapt all the tools at its disposal within its mandate to ensure that inflation returns to its target of medium term and to preserve the orderly transmission of monetary policy”.
“Upside risks to inflation could derive from an increase in the costs of energy and food goods. Increased geopolitical tensions could push energy prices higher in the short term, making medium-term prospects more uncertain”, it is underlined Still.
Furthermore, we read, extreme weather phenomena, and more generally the unfolding of the climate crisis, “could cause food prices to rise beyond expectations. A lasting increase in inflation expectations above the Governing Council’s target, or higher-than-expected increases in wages or profit margins could also push inflation upwards, even in the medium term. Conversely, a weakening of demand, attributable for example to a more intense transmission of monetary policy or to a deterioration of the economic context in the rest of the world in the face of greater geopolitical risks, would ease pressure on prices, especially in the medium term”, they write again from the Frankfurt institute.
“Most measures of underlying inflation continue to decline. At the same time, domestic price pressures remain strong, partly reflecting the growing importance of wage growth. Measures of longer-term inflation expectations are declining. they are mostly around 2%. Nonetheless, some indicators remain high and require careful monitoring”, communicates the ECB.
At the moment “the euro area economy remains weak” and “is likely to remain weak in the remainder of 2023. However, as inflation falls further, the recovery of real household incomes and the increase of demand for exports from the euro area, activity should strengthen in the coming years”, highlights the ECB in its economic bulletin.
Currently, “recent data indicate that the output of the manufacturing sector has continued to contract. The modest foreign demand and the tightening of financing conditions are increasingly weighing on investments and consumer spending. The services sector also shows a further loss of strength, mainly attributable to the spread of the weakening of industrial activity to other sectors, the weakening of the stimulus resulting from the effects of reopening and the broadening of the impact of higher interest rates”.
Economic activity, the ECB also indicates, “has so far been supported by the strength of the labor market. The unemployment rate stood at a historic low of 6.4 percent in August. At the same time, there are signs of a weakening of the labor market. The number of new jobs decreases, even in the services sector, consistently with the gradual transmission of the cooling of the economy to employment”.
“The risks for economic growth remain oriented towards the downside. Economic expansion could be lower if the effects of monetary policy prove stronger than expected. The weakening of the world economy would also weigh on growth. Russia’s unjustified war against Ukraine and the tragic conflict triggered by terrorist attacks in Israel are significant sources of geopolitical risk,” the bulletin reads.
“This – they write from Frankfurt – could lead to a loss of confidence and greater uncertainty among businesses and families, further weakening growth. Conversely, the economic expansion could prove to be higher than expected if, thanks to the continuing resilience of the jobs and increases in real incomes, families and businesses increase their levels of confidence and increase spending, or if the world economy grows more than expected.”
It’s still. Fiscal policies in the Eurozone should be formulated “with the aim of increasing the productivity of the euro area economy and gradually reducing the high public debt. Structural reforms and investments aimed at improving the supply capacity of the The area, which would benefit from the full implementation of the Next Generation EU programme, can help reduce price pressures in the medium term, while supporting the ecological and digital transitions.”
To this end, the ECB therefore indicates, “the reform of the EU economic governance framework should be concluded by the end of this year and progress towards the capital markets union and the completion of the banking union should be accelerated” .