Fears have spread among investors in recent weeks that the $ 1.9 trillion economic recovery plan proposed by US President Joe Biden and voted by the House of Representatives on Saturday would cause an overheating of economic activity.
An increase in the yields on the 10-year US Treasury bonds, which is an indicator of expectations, showed that the markets are expecting a rise in prices that exceeds the 1.4% recorded last year, which will force the US Federal Reserve to increase interest rates earlier than originally planned.
Yields on Treasury bills have increased in other countries as well, especially in France, where the yields on the ten-year bonds moved to a positive range for the first time in several months on Thursday, while the yields on German treasury bonds increased for ten years, even if they remain negative.
The inflation figures in Europe for the month of January showed an increase in prices by 0.9% compared to 0.3% in December, after the increase in the cost of raw materials was reflected in the prices of services and industrial products.
After inflation has slowed significantly in 2020, it is expected to pick up again this year in Europe as the economy recovers, following the easing of measures imposed to combat the spread of the Covid-19 epidemic.
But investors do not fear an increase in inflation as much as they fear that the US Federal Reserve will increase interest rates before the date it was announced.
Fed Chairman Jerome Powell pledged Tuesday to keep lending rates low until the economy reaches full employment and inflation rises above the 2.0% target.
However, bond yields continued to rise, indicating investor concerns about a rise in interest rates, increasing the cost of borrowing and investing and slowing the economy.
However, many analysts rule out that Biden’s plan to revive the economy would cause a noticeable increase in inflation.
“It is not clear how Biden’s recovery plan will generate extreme inflation,” said Xavier Rago, head of the French Economic Monitor, for studies.
It is unlikely that the recovery plans in the European Union would lead to a major increase in inflation.
He said, “The sums of European economic advancement plans do not pose any inflation risks at all.”
“No overheating of economic activity”
The European Commission approved a recovery plan worth 750 billion euros (920 billion jollars), and several member states also adopted their own national programs.
“We have a European recovery plan … much lower, and a much greater decline in the rate of growth, and therefore we do not face the same risks of overheating in the economy as in the United States,” said economist Fabien Trippier of the Paris-based Center for International Studies and Information. .
The US economy contracted by 3.5% last year, compared to double the rate in the euro area.
The head of the French central bank, Francois Villoroy de Gallo, stressed last week that “there is no risk of overheating in economic activity or a steady increase in inflation” in the euro area.
Xavier Ragu also ruled out that in the event that markets force the US Federal Reserve to increase interest rates, the European Central Bank will be forced to take a similar decision.
“Things are not going this way in the macro economy,” he said, pointing to the great divergence since the beginning of the last decade between the monetary policies pursued by the US and European central banks.
“Under the lax financial conditions that are still necessary to support the economy, it is unlikely that the European Central Bank will act in the face of the anticipated sharp increase in inflation,” said economist Jack Allen Reynolds of the Capital Economics Institute.
Francois Villoroy de Gallo, who was president of the French Central Bank and a member of the European Central Bank’s Governing Council, noted that the central bank wants to “preserve favorable financing conditions.”
Fabien Trippier believed that the European Central Bank should send a “strong signal” to the markets that “once inflation reached 1.5% or 2.2%, this does not mean that speculation begins that it will cause an increase in interest rates.”
The European Central Bank issued a reassuring message on Friday, as member of its Executive Board Isabel Schnabel announced that it might increase its support for the economy in the event of a sharp rise in interest rates.