Two top European Central Bank policymakers warned of a rising tide of imported inflation on Thursday, pushing up the euro and Bund yields on the view that the ECB could start taking corrective action. Some ECB policymakers have sounded increasingly aggressive on inflation over the last month after eurozone data showed it topped the ECB's preferred level of just below 2 percent for the first time in two years in December, hitting 2.2 percent.
Lorenzo Bini Smaghi, one of the six ECB executive board members, warned that sharper rises in prices of commodities and emerging economy-made goods could push up eurozone inflation unless domestic prices were controlled. "A permanent and repeated increase in the prices of imported products will tend to impact on inflation in the advanced countries, including the euro area," he said in a speech in Bologna, adding that this trend could not be ignored.
To avoid second-round effects, such as higher wages, prices in advanced economies such as the euro area would have to rise by no more than 1 percent a year. "Otherwise, monetary policy has to become more restrictive than it should be, which leads to slower growth," Bini Smaghi said. The euro hit fresh two-month highs against the dollar and yen and two-year Bund yields hit their highest since October 2009 after the comments.
Analysts have raised their forecasts for European bond yields due to inflation pressures in Europe, a Reuters poll showed on Thursday. They now expect the yield on 10-year German government bonds to stand at 3.50 percent in 12 months time compared with 3.10 percent in a November poll. The yield is now around 3.19 percent. Financial markets have also brought forward their forecasts for when they expect the ECB to start hiking rates from the current 1 percent record low following the change in the ECB's tone, with economists polled by Reuters seeing the bank taking action in the last quarter of this year rather than early next year.
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