×

German inflation and French election push up borrowing costs across Europe

People walk on Pariser Platz square in front of the illuminated Brandenburg Gate in Berlin.
Getty Images
People walk on Pariser Platz square in front of the illuminated Brandenburg Gate in Berlin.

The cost of borrowing across Europe spiked up Monday as German inflation figures and French elections triggered concern over whether central bank stimulus could be cut short.

Official data from Germany' statistics office show consumer price inflation across the country has risen 1.9 percent year-on-year, the highest level since July 2013.

It slightly undershot forecasts of a 2.0 percent rise and sent the euro to an 11-day low.

The European Central Bank (ECB) has a core mandate to target inflation at or around 2 percent and any hint of rising prices could pressure the central bank to end its easy monetary policy sooner rather than later.

Jan Randolph, Head of Sovereign Risk at IHS Markit, said in an email Monday that some investors have taken higher inflation in Germany as an excuse to shift out of bonds into equity.

He said the inflation print will add more fuel to the fire of those in Berlin who oppose Quantitative Easing (QE).

"Current ECB QE policy [along] with 2% inflation in Germany, will definitely ire the Germanic monetarists and other hawks.

"Mario [Draghi] can only point out that ECB policy is for the Eurozone as whole where inflation is much lower, not just Germany," he said.


French election

Francois Guillot | AFP | Getty Images

French government bond yields also rose sharply on Monday morning to reach 16–month highs.

The OAT (Obligations Assimilables du Trésor) sell-off was quickened by news that a hard-left candidate for the French presidential election, had been picked as the Socialist nominee.

Meanwhile on the other side of the political spectrum, Conservative leader Francois Fillon is struggling to regain momentum after a scandal involving payments to his wife.

Randolph said the market is now pricing a slimmer chance of an established political party grabbing power in France.

"The appointment of radical-left winger Benoit Hamon yesterday, together with the possible scandal associated with Francis Fillon's wife as paid-secretary, together makes the establishment parties chances weaker and the presidential race much more open than before," the analyst said.

Randolph warned that victory for far-right candidate Marine Le Pen would put pressure on French bond's to the extent that the ECB could consider new action.

"That would be a nightmare Europe game-changer scenario, much more than Brexit or Trump combined."