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European bond spreads: mind the gap

Interest rate changes always have winners and losers. Even more so when 19 different member states are involved
June 23, 2022
  • Rising interest rates look set to impact eurozone economies asymmetrically, causing a policy headache for the ECB 
  • Concerns about the impact of July’s proposed rate hike led to a rapid increase in the gap between Italian and German 10-year government bond yields

The ECB is in a tight spot. With euro area inflation expected to hit 8.1 per cent in May, the ECB intends to introduce its first rate hike since 2011. An initial increase of 0.25 basis points is slated for July, with a further rate rise indicated for September.

Interest rate rises always have winners and losers. In the UK, the Monetary Policy Committee balanced its decision to raise rates last week against the risks posed by slower-than-expected GDP growth and falling consumer confidence. But these trade-offs are even more painful in Europe. The ECB is forced to balance the same set of competing pressures – but across 19 very different member states.

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