Threat of global inflation and rate hikes inch closer to home        

Federal Reserve believes price hikes and inflation pressures may be here to stay

Market watchers were caught out by the hawkish comments released by the US Federal Reserve about inflation and wage growth that might lead it to hiking interest rates in response. 

The threat of global inflation inched closer to home today as experts wait to see whether the ECB will hold out in its "fascinating" battle to keep mortgage and business interest rates from rising this year. 

The implied cost for the Government to borrow from international debt markets rose with the yield on its 10-year bond increasing to 0.34%, along with most other sovereign governments in Europe.

It comes after market watchers were caught out by the hawkish comments released by the US central bank, the Federal Reserve, about inflation and wage growth that might lead it to hiking interest rates in response. 

The comments appear to suggest that the Federal Reserve believes that price hikes and inflation pressures across the world, which have been made worse by supply chain shortages and huge demand for labour, may be here to stay. 

That would in turn bring into sharp focus the pledge by Christine Lagarde, president of the ECB, for it to keep its key rates at historically low levels because it maintains that global inflation, in the jargon of central banks, is only "transitory" and does not require interest rate hikes to defeat it. 

The stakes are high because if the ECB is wrong and the Federal Reserve is right, then ECB rates will likely increase earlier than expected.

That in turn would push up the costs of borrowing for Irish households in all types of loans, including tracker and other mortgages and car loans, and for the borrowing costs of Irish businesses too.  

"They both can't be right and it is a fascinating to watch how it will work out," said    Ryan McGrath, head of fixed income sales at Cantor Fitzgerald Ireland.

Ryan McGrath, head of fixed income sales at Cantor Fitzgerald Ireland.

The ECB is very much committed to the idea that inflation is transitory and that therefore will be self-correcting, while the Federal Reserve and the Bank of England aren't so sure, Mr McGrath said.         

He  said the US central bank could be bringing its interest rate increases forward to as early as March — a significant event so soon after the worst of a global pandemic. 

Ms Lagarde has pledged the ECB will not hike interest rates this year and has said increases were unlikely in 2023, but that conviction will be under test in the next few months, the head of fixed income said.  

Wage increases and supply disruptions are helping to drive inflation, while energy costs, although they are rising from a low base, are being closely watched, economists say. 

Investors expect the Bank of England to raise interest rates as early as next month after a surprise hike in December, and British companies are planning to boost prices by 5% in the next year, a Bank of England survey showed, indicating increasing inflationary pressures across the economy. 

The findings may add to pressure on the Bank of England to rein in UK consumer-price growth that the central bank expects may reach 6% this year, triple its target.

European wholesale gas prices settled at €95.80 per kilowatt per hour today, while the Brent crude oil price traded at $82.10 (€72.60) a barrel, up by around 1.5% in the session.