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Markets

Europe less at risk of inflation and rate fears: analysts

  • However, many analysts are sceptical that Biden's stimulus programme will spark considerable inflation.
Updated 28 Feb 2021

PARIS: Investors are watching inflation carefully, worried that a boiling over of prices will ruin the expected strong pandemic recovery although analysts believe Europe faces much less of a risk than the United States.

Fears that US President Biden's $1.9 trillion stimulus plan -- which was passed by the House of Representatives on Saturday -- will stoke up the economy too much have unnerved investors in recent weeks.

A rise in yields on 10-year US Treasury bonds -- a key indicator of expectations -- shows the markets believe prices are set to rise much more sharply than last year's gain of 1.4 percent, which could force the US Federal Reserve to hike interest rates earlier than it says it plans to do.

Bond yields have risen elsewhere too, with 10-year French government bonds turning positive on Thursday for the first time in months while the benchmark 10-year German Bund has also risen although it remains negative.

European inflation data for January showed a jump in prices of 0.9 percent compared to a minus 0.3 percent reading in December, as increased costs of raw materials fed through into services and industrial goods.

After having slowed considerably in 2020, inflation is expected to rise this year in Europe as the economy picks up following the relaxation of measures to slow the spread of the Covid-19 pandemic.

But it is not so much a spike in inflation that worries investors but that the Fed would raise interest rates faster than it has communicated.

Federal Reserve Chairman Jerome Powell pledged Tuesday that the US central bank will keep benchmark lending rates low until the economy is at full employment and inflation has risen consistently above its 2.0 percent target.

But bond yields continued to rise, indicating investor concern about a rise in interest rates that would make borrowing and investment more expensive and slow the economy.

However, many analysts are sceptical that Biden's stimulus programme will spark considerable inflation.

"It isn't clear that Biden's recovery plan will create lots of inflation," said Xavier Ragot, head of the French Economic Observatory think tank.

For the European Union, there is no likelihood that its pandemic recovery programme would, he believes.

"The amounts of the European recovery plans pose absolutely no inflationary risk," he said.